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The Donor Advised Fund – An Effective Planning Tool

The Donor Advised Fund – An Effective Planning Tool

July 23, 2019

Is charitable giving important to you? Is it possible that charitable giving might become more important when you know you have enough money to be okay for the rest of your life? Do you like paying less income tax? If so, you might want to evaluate a Donor Advised Fund.

According to the American Endowment Foundation, “a Donor Advised Fund (DAF) could be best described as a charitable investment account that provides simple, flexible, and efficient ways to manage charitable giving. The money or assets that go into a donor advised fund becomes an irrevocable transfer to a public charity with the specific intent of funding charitable gifts. This public charity serves as the administrator of the DAF.” *

Here’s how a typical Donor Advised Fund works:

  1. Open your Donor Advised Fund account.
  2. Make an irrevocable charitable contribution from your personal assets; such as cash, appreciated investments, real estate, life insurance, shares of limited partnerships and limited liability companies (each DAF will have their own list of approved assets).
  3. The contribution resides in your DAF account. Depending on the custodian, it’s possible that you, your investment advisor or the custodian can manage the investments.
  4. You immediately receive the maximum tax deduction allowed by the IRS.
  5. On your own timetable, you can recommend grants from your account to qualified charities and nonprofit organizations.
  6. Any non-granted funds in the account continue to grow tax free.

In short, you receive the tax benefit for the contribution in the year you make the contribution. But, you can delay making the actual grant for…years if you wish. And, if you pass away, you can make the fund part of your estate plan.

At Second Half Strategies, we see many planning uses for Donor Advised Funds. Here are a few that come to mind:

  1. Offsetting taxes associated with a ROTH IRA contribution.
  2. Offsetting taxes associated with sale of business.
  3. Offsetting taxes associated with an income windfall (large bonus, big commission).
  4. Creating enough Schedule A deductions to receive a tax benefit (made more attractive with recent changes to the tax code).
  5. Saving pre-retirement for charitable contributions that you might want to make post-retirement.
  6. Building funds to create a legacy of future family giving. Can be particularly effective in teaching children about the impact of charitable gifts.

Here are some questions that you might want to ask when evaluating a donor advised fund:

  1. Are you able to make grants to any 501 (C) 3 organization?
  2. Are you limited to how much you can grant from your donor advised fund in any one year?
  3. Is there any requirement that grants be made to the entity holding the fund? Or do you have full discretion as to where the grants go?
  4. Is there any limitation as to the types of assets that can be accepted by the donor advised fund?
  5. Are the investments in the donor advised fund commingled, or do you have any say in how the investments are managed?
  6. What are the annual costs associated with the donor advised fund? With the investments?
  7. How do you make contributions? How do you make grants?
  8. When you have a question, who do you call? Do you speak with someone locally?
  9. What happens to your account if both of you pass away?
  10. If you decide to move the funds outside of this donor advised fund, can they be transferred to another donor advised fund? If so, is there a cost to do so?

As part of our Integrated Wealth Management process that includes Planning, Guidance and Advice, we incorporate conversations about and create plans for charitable giving. Although there are many different charitable planning techniques, the Donor Advised Fund is a simple, effective and cost efficient way for many to achieve their charitable goals – and save taxes at the same time. Let us know if you would like to discuss how a Donor Advised Fund might be incorporated into your planning!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Second Half Strategies and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.