Consider a donor-advised fund (DAF) if charitable giving is essential to you. Usually sponsored and managed by a community foundation or commercial investment organization, a DAF provides many of the same benefits as a private foundation at a lower cost.

A DAF allows you to contribute tax-deductible funds to an investment account while advising the fund on which charity your contributions and earnings should go. Of course, the sponsor must have the last word on how to spend your philanthropic donations due to tax restrictions. Still, in most situations, the fund will follow your recommendations.

Benefits to a DAF

The following are some of the advantages of a DAF:

• Immediate charitable deductions. The ability to set up a DAF quickly and secure an immediate charitable income tax deduction without the need to identify a specific charitable beneficiary is attractive to many donors. What is the significance of this? Perhaps this is an ideal year for you — from a tax perspective — to make significant charitable donations, but you haven’t determined which charities you want to support.
• Simplicity and low cost. A DAF is virtually as inexpensive and simple to start as a mutual fund account. The average minimum contribution is $25,000, while some DAFs allow you to begin with as little as $5,000. Private foundations typically require six- or seven-figure contributions, take several months to set up, and come with substantial legal fees and additional costs. Additionally, a private foundation needs you to form a board, hold regular board meetings, record meeting minutes, and file tax returns. In contrast, a DAF’s sponsor handles investment management and administration.
• Higher deduction limits. DAF contributions are tax-deductible up to 60% of your adjusted gross income (AGI), like gifts to other public charities. Non-cash donations are tax-deductible up to 30% of AGI. For private foundations, the deduction ceilings are 30% and 20%, respectively.
• Privacy. Unlike private foundations and other charitable giving vehicles, A DAF allows you to remain anonymous if you want to. Because a DAF sponsor is technically distributing its own assets when it donates to a charity, you can choose to have your name removed. Alternatively, you might name your DAF after your cause, such as the Alzheimer’s Research Fund.

Disadvantages of a DAF

When you contribute assets to a DAF, they become the property of the sponsor. As the name implies, your role in directing distributions is simply advisory. That is, you have little or no control over investment management.

Make a cost-benefit analysis

The amount of money you want to give to charity, the amount of time and resources you want to devote to philanthropic activities, your desire to retain control over your charitable assets, and other estate planning goals all determine whether a DAF is ideal for you. We can assist you in weighing the costs and benefits of a DAF to see if it’s for you. Contact our RRBB accountants and advisors today.

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