A donor-advised fund is an easy-to-establish, lower-cost, flexible vehicle for charitable giving, an alternative to direct giving or to creating a private foundation. This fund is set up under the umbrella of a public charity and serves as a sponsor to many funds. As a result, a donor-advised fund can provide the charitable and tax benefits of a private foundation without some of the expense, legal requirements, and administrative hassle.
As a donor, you receive a tax deduction from your contribution, but you may be able to avoid excise taxes and some of the cost of establishing and administering a private foundation. Once the contribution is made, however, the foundation administering the fund assumes full control over the contribution and will grant you advisory status. Thus, fund administrators are not legally obligated to you; however, they will generally adhere to your requests and make grants to the public charities of your choice.
The donor-advised fund may be appropriate when you want to make modest donations of $5,000 or more and to retain the ability to change the charitable beneficiary of your gifts.
Examples of DAF Strategies:
- A married couple with an adjusted gross income of $200,000 and a total net worth near $2 million wish to lower their tax burden while benefitting their favorite charities. Establishing a DAF with $50,000 of appreciated securities allows them to claim a $50,000 income tax charitable deduction and avoid state and federal capital gain taxes when the DAF sells the securities. They are now able to recommend grants to charities from the newly-formed DAF while benefiting from a tax savings of more than $20,000.
- A retired teacher wishes to create and fund a college scholarship program to assist students at the high school where she taught. After consulting with the school, she creates a scholarship fund with the Foundation by contributing the first of a series of $10,000 annual gifts to the fund. Each year, she recommends that the Foundation make a grant from the scholarship fund. She now can claim an income tax charitable deduction for each gift to the fund and, because the scholarship fund carries her name, ensures her legacy as an educator.
- A married couple with an adjusted gross income of $85,000 and a net worth of $1 million, including a highly appreciated $150,000 rental home, wish to sell the rental home and benefit a local children’s museum. By transferring the real estate, along with a $10,000 mutual fund to cover anticipated holding costs and expenses, to the Foundation and allowing the Foundation to sell the property tax-free, the net sale proceeds will create a $150,000 DAF from which they can now make quarterly grant recommendations to the children’s museum. The couple thereby completely avoids capital gains taxes, receives an income tax charitable deduction for transferring the property to the Foundation, and will benefit the children’s museum in perpetuity.
