What Is a Donor Advised Fund and Its Benefits?
A Donor Advised Fund (DAF) is typically a charitable giving or philanthropic vehicle administered by a public charity. It is meant to manage various charitable donations on behalf of individuals, families, and/or organizations. It allows donors to make charitable contributions, gain an immediate tax advantage, and give recommendations for grants from the fund over a certain period of time.
Generally, DAF is like a charitable-savings account where donors contribute to the fund as often as they want and then give grant recommendation to their favorite charity immediately when they are ready. Donors usually have a large number of choices at their disposal, especially when they want to make contributions to a non-profit organization. An outright "gift" is one of the most popular options, but they can as well donate through a private foundation. The option that offers the most control for an individual is to come up with a donor-advised fund.
This kind of fund is best for certain types of donors – people who want and are willing to make substantial donations to some nonprofit organizations or people who want to just make relatively small donations to a large number of the similar organizations or foundations.
The Basics of Donor Advised Fund
In any given time, you can contribute to or set up a DAF that will qualify for tax deduction only in that particular time/year. This is effective because instead of making your donation directly to a non-profit organization, you make it directly to the fund and after that you will decide its allocation at a later date. The tax-deductible contributions amount can be up-to 50 percent of your adjusted gross-income.
Even though the fund investment can sometimes grow tax-free, there are some charges involved and there is no increase guarantee on that investment. Once you make a donation, it is then managed by a non-profit sponsor organization and you will not be able to make a personal withdrawal directly from it. However, you are allowed to give direction to or advise the sponsor foundation on where to give your favorite grants.
The Benefits of a Donor Advised Fund
There are distinct benefits for individuals who give their contributions to these funds. Here are some of those advantages:
1. The Community Foundation staff is always available to help donor advisors who wish or would like to identify new opportunities for funding or places of urgent need in the community, especially those needs that meet the particular philanthropic interests of the donor.
2. Often, the option of the Donor Advised Fund is attractive to all trustees of private foundations and organizations who don’t want to continue assuming the investment or administrative responsibility of operating a private foundation.
3. When the period for advice ends, which usually happens when the donor dies, a DAF becomes a Named Fund particularly in the Community Foundation General Endowment, so that the local giving tradition of the family is perpetuated.
4. For people whose stock-portfolios have grown too heavy in equities or those facing huge capital gains due to a stock buy-out, making such stock contributions to create a DAF will help avoid the capital gains mainly on the contributed stocks.
5. For donors who get huge amount of ordinary income in a given year, a DAF can offer a good opportunity to develop a great charitable giving plan and an offsetting tax-deduction.
6. All the taxes due on the gains from the sales of business or on distributions from several retirement plans can be offset in several cases by simply contributing these assets.
7. They minimize the urgency to look for the right nonprofit or charitable cause within a certain period of time. Therefore, you only make your contributions whenever you want and also decide the disbursements according to your own schedule.
Other advantages of Donor Advised Fund include;
• They offer the right tool for tax planning,
• They promote planning, proactive giving and gift strategy,
• They also give opportunity for anonymity since most gifts come directly from this type of fund,
• They create a great structure for allocating these funds for future giving with less administration responsibilities,
• DAFs also sallow an individual to have a good satisfying response to request for more donations as anyone can refer to their preconceived plan,
• They are also very easy to create and do not need the involvement of a lawyer.
Conclusively, a Donor Advised Fund is more flexible compared to a private foundation. Those need certain amount of funds paid out each year and more reporting and those tend to have very high administrative costs can all fit into this platform.
ASK ERIKA | Ask me how the Community Foundation can help you and your clients make a difference in the community with a Donor-Advised Fund at LVCF
Erika Riddle Petrozelli, CPA
Director of Donor Services
840 West Hamilton Street, Suite 310, Allentown, PA 18101
610 351-5353 Ext. 13 | Erika@lvcfoundation.org