PAY INVOICE

What the DAF?

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Pam Vogel, CPA

Jim has one. You heard Roberta talking about one at the BBQ last week. The Millers have one with their name on it, but Mark’s doesn’t. Or is that a family foundation? Bob says they are fabulous for controlling the timing of your charitable tax deductions.  Susan likes the fact she no longer has to write charitable checks all year. Your financial/wealth advisor and tax accountant insist you set one up. What the DAF?

Here are some general answers to common questions about Donor Advised Funds (DAF).

What is it?

Quite simply, a Donor Advised Fund (DAF) is a fund of money, where the donor gets to advise where the funds go, hence the catchy name. More specifically, it is a charitable giving vehicle sponsored by a charity (could be a Community Foundation or a brokerage house like Fidelity or Vanguard) where an individual can contribute funds, get a charitable tax deduction, and generally has significant say in how funds are ultimately distributed to charities.

Why are they so popular?

DAFs are popular for the charitably inclined as they offer:

  • Tax benefits. Contributions to DAFs are deductible as a charitable contribution in the year DAF is funded.  You can fund once, annually, as frequently or infrequently as you would like.
  • Unlike Roberta at the BBQ, you can set up your DAF to have a generic name such as I Love Cupcakes Fund.  When you contribute to I Love Cupcakes Fund it is completely private.  When I Love Cupcakes Fund distributes money to a charity, the donor is identified as I Love Cupcakes Fund.  Many high wealth individuals appreciate this level of privacy.
  • Timing of deduction. You can control the timing of your tax deduction.  Your charitable deduction is claimed in the year you contribute to the DAF, not the year the DAF distributes funds to charities.  If you give the local YMCA $10,000 a year, but have a significant taxable income event in 2022, you could contribute $100,000 in 2022, deduct $100,000 as a charitable contribution in 2022 to offset your income event, and distribute $10,000 per year from the DAF for next 10 years to YMCA.
  • Advantages for small charities. You may have a favorite very small charity that lives on a $25K per year budget. You would like to generously give it $50K. If you do that in one year you could cause the charity to fail its public support tests and lose its exempt status.  But, if you fund your DAF with $50K and then dole out $5K a year to the charity, it is a win-win and doesn’t put small charity’s exempt status at risk.
  • Administrative simplification/or “charitable checkbook”. Tired of responding to 100+ donation requests during the year and writing $100 checks to each?  With a DAF you can focus your charitable giving, advise the DAF on what charities to fund and to what level, and let your local Humane Society know they should contact your DAF (not you) to request funds. No need to hunt down the 42 checks you wrote from your regular checkbook during the year for your CPA.
  • Technically, you are an advisor to how your DAF funds are distributed.  All of the advisors decide on how funds are charitably distributed. In the real world, you are generally the only advisor. So if the recipient is a §501(c)(3) organization, your request to send funds to them will be almost certainly be approved.

How many Benjamins should you have before opening one/who should not consider one?

  • This one is hard to answer. Some professionals say $25,000 while others say $1,000,000+. Unlike a Private Foundation, a DAF does not file a separate tax return, thus significantly lowering the administrative costs.  However, most fund managers charge 1-3% investment/management fees.  Choose your foundation/fund manager carefully to ensure your returns in the DAF meet or exceed the administrative fees.
  • If you do not itemize your deductions, a DAF is likely not the charitable vehicle for you.
  • If you do not need to front load or time your charitable deductions, a DAF may not be necessary for you.

What can I donate to my DAF?

  • Cash
  • Appreciated securities (be sure they are long term!)
  • Life insurance policies
  • Sometimes complex assets (privately held stock, S corporation shares, etc)
  • Private equity/hedge fund interests

What happens if I change my mind?

  • Not going to lie. Too bad, so sad. The moment you move assets to a DAF is the moment you no longer own them. The DAF does. You get the tax deduction, you get to advise one how funds are spent down, but you cannot regain those assets.  The DAF is a stand alone entity separate from you.

How is it different from a Private Foundation?

  • WARNING: Beyond the Scope of This Blog. BUT….  A private/family foundation (“PF”) is a separate entity holding assets a taxpayer contributes (during lifetime or upon death) to be held and managed independently.  A PF must distribute 5% of its assets annually to charitable causes and file an annual tax return.  In addition, it pays 1-2% excise tax on its net investment income annually.  It must be actively managed. While it can achieve some of the same goals (timing of charitable contribution, privacy, etc), it is significantly more complex to administer and should be considered for larger funding amounts ($2,500,000 and above).  You can employ family members to work for foundation for bona fide services (an upside).
  • There are SIGNIFICANT penalties for mismanaging a private foundation or accidentally using assets in an improper manner. Officers/directors need to be fully versed in these rules to avoid penalties or exempt disqualification.

Takeaways?

  • A DAF is a great option for charitably inclined taxpayers. Charitable intent should be your primary objective. Figure out your charitable intent FIRST, then decide best way to achieve goals.  DAF, charitable remainder or lead trust, beneficiary of a will or trust, direct contribution, matching gift, major gift, qualified charitable distribution from retirement plans, etc should all be contemplated.  All possible future blog topics!
  • If you meet the charitable intent threshold, a DAF can offer you the ability to turn on/off the flow of your charitable giving and timing of deductions.
  • If you simply want to give money each year to your alma matter, skip the DAF middleman and do so. This does not meet the timing, privacy or administrative simplification requirements.

Last words?

Origin CPA Group has years of experience advising our clients on all nature of charitable giving, including DAFs. Our proactive approach helps identify, analyze and execute a charitable gifting plan.

To learn more about this topic contact Origin CPA Group today.