Understanding Donor-Advised Funds: Your Philanthropic Journey
Charitable giving is a personal and powerful act that can transform the lives of those in need. Beyond your personal wealth and legacy, there’s a vast world of charitable giving strategies that can elevate your philanthropy to the next level.
In this exploration, we unpack the concept of Donor-Advised Funds (DAFs) and dissect why they’ve become a popular philanthropic strategy. Here, you will learn what DAFs are, how they function, their benefits, and much more. Let’s embark on this philanthropic journey.
What Is a Donor-Advised Fund (DAF) and How Do They Work?
How do you use a DAF?
At its core, a DAF is a charitable giving account that provides an immediate tax benefit and allows you to make grants to charities over time. In your DAF, contributions to the account are irrevocable and the sponsoring organization has legal control over the assets.
Establish an account
Setting up a DAF is akin to creating a charitable investment vehicle. Your individual DAF would be created at the public charity arm of a financial institution. The charity is referred to as the sponsoring organization. You, as the donor, would work directly with the sponsoring organization to establish the fund.
Make a contribution
The way you fund your DAF can be as varied as the charities you aim to support. You can use cash, publicly traded securities, life insurance policies, private investments, or even qualified real estate assets, usually subject to limitations and approval by the sponsoring organization. Once you make your contribution, the sponsoring organization has legal control over it.
Choose your charities
One of the key advantages of a DAF is the freedom you have in choosing the timing and the number of charities to support. Whether you’re passionate about local community initiatives or large international aid organizations, a DAF typically offers a wide variety of charities to which you can make grants Your charitable contributions are streamlined, and and the sponsoring organization tracks your gifts for tax purposes.
How much does it cost to have a donor-advised fund?
The costs associated with a DAF include administrative fees that are typically a percentage of the fund’s value. The sponsoring organization may also charge fees for investment management and/or grant-making services. However, these costs can often be offset by the tax advantages of utilizing a DAF. It’s essential to carefully consider which sponsoring organization and fee structure best align with your charitable goals.
4 Key Benefits of a Donor-Advised Fund
Tax benefits
Contributions to a DAF are tax-deductible in the year they are made, even though distributions to charities can be made in future years. This can be particularly advantageous in high-income years where you may benefit more from the tax deduction. You may be able to consolidate several years worth of gifts in order to receive a tax benefit in a single year. Be sure to check with your tax adviser to see if this strategy is right for you.
Simplified giving
DAFs centralize your charitable giving, which simplifies record-keeping. This means you don’t have to keep track of multiple receipts or donation acknowledgments like you would if you gave directly to a charity.
Flexibility
While you receive an immediate tax benefit for your contribution, you are not required to make the donations immediately. This allows you to time your grants to align with your broader financial and charitable goals.
Establishing a legacy
A DAF can be included in your estate plan, allowing your family to continue supporting the charitable causes that are important to you. This can create a lasting legacy and serve as a moral compass for future generations.
Are there any limitations to what I can do with a DAF?
As with any financial tool, there are considerations to keep in mind. DAFs have certain guidelines that need to be followed, and they cannot be used to fulfill pledges or directed for personal benefit, like gala tickets. If you are in “RMD Mode”, you cannot contribute to a DAF with any of your required minimum distribution.
When a DAF Might Not Be a Fit
While DAFs are a versatile philanthropic solution, there are scenarios where they might not align with your giving strategy. Understanding these confines is crucial in shaping a holistic approach to charitable giving. Let’s explore some reasons why a DAF might not be the best fit for you.
- If you prefer to have personal involvement in the charities you support and want to establish deeper relationships with them, a private foundation or direct giving may be a better option.
- If your charitable contributions are relatively small, creating a DAF may not be necessary, as administrative fees could outweigh any potential tax benefits.
Next Steps
Philanthropy is personal and unique. If you see a DAF as a potential avenue for your charitable giving, we encourage you to reach out to your Howland Capital portfolio management team. With our shared expertise and your charitable vision, we can sculpt a giving strategy that resonates with your financial goals and the causes close to your heart.
