A few weeks ago, our Stream blog highlighted how you can give to charity by donating your appreciated investments. As the donor, you receive an income tax deduction for the fair market value of the securities. The charity receives your donated investments, sells them, pays no taxes and uses the proceeds to support its cause.
Today we’re introducing using a Donor Advised Fund (or “DAF”) as a strategy that provides benefits to you beyond those of an outright gift of securities. If you are interested in making current (and perhaps ongoing) gifts to charity, but you’ve not yet decided about when and how much you wish to give to charity, a Donor Advised Fund may appeal to you.
With a Donor Advised Fund, you donate funds to a non-profit entity (the DAF) which is typically managed by a financial services company (e.g. Schwab Charitable) or local community foundation (e.g. Oregon Community Foundation). You receive an immediate tax deduction for the fair market value of the gift. The deduction is limited to 50% of your Adjusted Gross Income (AGI) for a cash donation and 30% of your AGI for a donation of appreciated securities. There is a 5-year carry-forward for any unused tax deduction.
Donor Advised Funds require relatively small gifts to be established and even smaller future annual gifts. So, you do not need to give away the kind of large sums that are often associated with private foundations.
The Donor Advised Fund invests your gift(s), and will generally follow your investment management preferences. You can choose from professionally managed pooled investment options. You can also have your investment advisor manage the fund for you, as long as it meets an account minimum (which varies by institution). The DAF will charge a management fee that varies from fund to fund and is based on the size of your account within the fund. Schwab Charitable, for example, charges 0.60% for the first $500,000.
There is no requirement as to the timing of the gifts that the Donor Advised Fund makes to charities you designate. However, the gifts must be made to public charities. Also, you, as the donor, may not derive any benefit from the DAF’s gift to the charity.
When might someone fund a Donor Advised Fund? We have seen clients set up and fund a DAF during an unusually high-income year. If your income were typically $100,000 a year and, for whatever reason, you expected to earn $300,000 in taxable income this year and you have charitable intent, you might consider funding a DAF this year. Such a strategy would use the tax deduction for the gift to the DAF to reduce your taxable income.
What if you wanted to get started giving to charity, but you were not certain about which charity you wished to benefit or when? The DAF would allow you to make current gifts and receive an immediate tax deduction and yet defer the decision about which charities to benefit and when.
The Donor Advised Fund is less expensive to set up and administer than a private (or family) foundation. It will also allow you to make anonymous gifts to charity or gifts in memoriam if that is preferred.
If you have questions about setting up a Donor Advised Fund, you should consult with your tax and investment advisor.