Charitable giving can be done in a spectrum of simple to sophisticated administrative approaches. The simplest form is direct cash donations to selected charities. The most complex is a family or private foundation. The Donor Advised Fund (DAF) occupies a middle ground and may be a good choice for families with a low seven-figure net worth.
A DAF is a 501(c) charity that takes irrevocable ownership of funds transferred to it. However, control over the distribution of those funds remains with the donor. This allows for a smooth flow of donations into and out of the DAF at the donor’s discretion, while a tax deduction is generated at the time of contribution.
With changes in the tax law at the end of 2017, a DAF will make either more sense or less than it did previously, depending on itemization. For taxpayers who will clearly take a standard deduction, the DAF tax advantage is lost.
For taxpayers who are close to transitioning from the standard deduction to an itemized deduction, the DAF can work by taking a large deduction every few years, pushing the equation clearly to itemized side during those years. The actual donations can then be smoothly made on the desired schedule over successive years.
Three types of DAF administrators are common; 1) community based, 2) affinity group based, 3) affiliates of financial services companies. The choice of administrator type will depend on the goals of the family. Community-based DAFs, with deep local knowledge, may be good choices for those focused on the needs of a specific community. Affinity groups, such as universities, can be a good expression of loyalty.
Affiliates of financial services companies may offer the best opportunity to continue growing the donated funds through a good offering of mutual funds. Additionally, while these are separate legal entities from the sponsoring companies, the websites may be integrated in a way that provides an easily visible full financial picture.
The DAF structure has additional tax benefits, including minimizing AMT impacts and estate planning advantages. If you would like to understand how a DAF could fit into your total financial picture, please contact us.