Using Donor Advised Funds for Your Charitable Giving
A donor advised fund (DAF) permits an accelerated charitable tax deduction using appreciated stocks without being taxed on the gains while enabling you to budget distributions to the charities of your choice, conserving your cash position and possibly reducing a concentrated stock position. And they are extremely easy to establish.
There are numerous sponsoring DAFs including commercial vendors such as Schwab, Fidelity and Vanguard and not-for-profit organizations such as the New York Community Trust, Catholic Communal Fund of the Archdiocese of NY and the Jewish Communal Fund. These are mentioned for illustration purposes but there are many more particularly in large metropolitan centers such as Princeton and Philadelphia. Minimum contributions to open a DAF are $5,000 to $10,000 depending upon the DAF.
The way it works is for a contribution of cash or stocks to be made for which you will be entitled to a tax deduction for the year of contribution. The funds are then segregated in a bookkeeping manner, invested in some sort of conservative way and held until eventually disbursed to the charities designated by you. The funds transferred to the DAF cannot be returned to you, nor do you have any rights to the funds. What you can do is make recommendations of a public charity where you want the funds distributed to. Usually the DAF will comply with your wishes. Before you open the account you should ascertain that they will accept recommendations to the types of charities you contemplate donating to. Any earnings, less the DAF administrative charges, will be added to your “account” and available for future contributions. There is usually no time limit so your contribution could be housed in the DAF for many years. No tax forms need to be filed and there is no cost or any type of compliance actions on your part. When the donations are made to your charity of choice you will not get a tax deduction since you received the deduction upfront in the year you contributed to the DAF. However, your charity will receive a letter acknowledging that you are the contributor.
Contributions can be made in your or your spouse’s name or any other family member, and you can designate numerous family members that can make recommendations. You can also make contributions anonymously if you want to stop the flood of solicitations you are now getting.
The best way to utilize a DAF is to donate appreciated securities. For those with large concentrated stock positions this is a method to reduce these holdings, not recognize the profit, use the DAF for future contributions and conserve your existing cash. It is also beneficial for someone with a large taxable gain this year because they can accelerate what they normally would contribute over the next few or more years and get the upfront deduction. Designations can be made on your own time table in any amounts you want. Some funds have minimum contribution amounts but these are usually quite low. It is also something that someone that will be retiring in a few years can do to get the deductions while they are in a higher tax bracket and have their contributions continue when they are no longer receiving their salary.
Some people set up such funds for children to instill a giving attitude and use this on a test basis before setting up a private foundation which is more involved with tax filing, minimum distribution requirements and annual costs.
These contributions, like all contributions have IRS imposed maximum annual deduction amounts. This should be checked with your tax advisor before making the contribution.
The above was adapted from three blogs my partner, Raymond Russolillo, posted on his www.charitable-nation.com blog site.
Links to his blogs with much more information are:
https://charitable-nation.com/2013/02/18/tools-techniques-101-the-donor-advised-fund/
https://charitable-nation.com/2013/09/18/tools-techniques-101-the-tandem-donor-advised-fund/
https://charitable-nation.com/2014/01/08/tools-techniques-101-the-community-foundation/
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