The Donor-Advised Fund (DAF) is the fastest-growing method of philanthropic giving in the United States today. Countless institutions are marketing the opportunity to create one as the end of the tax year nears. The perks can sound too good to be true. Are they?
.In a nutshell, DAFs allow donors to receive immediate tax deductions for their irrevocable philanthropic contributions. The contributions then grow tax-free while the donors recommend where to give them as grants, at their leisure, with no deadline.
We are big fans of DAFs. They are a wonderful tool to begin your strategic philanthropic journey, or to compliment a family foundation.
Here’s what you need to know before opening one.
Every policy and DAF provider are different - Read the fine print. Know the answer to the following questions before opening an account:
Is there a minimum investment requirement, and how much is it?
Does the fund mandate a certain grant size?
What types of assets will the fund allow you to contribute?
Is there a minimum annual distribution?
Can you select the investment allocation?
DAFs can be too good to be true - Be aware, there are real drawbacks to DAFs. Here are a few:
The possibility of hidden fees.
Donors lack legal authority over the outcome of their grant requests.
DAFs are not legally required to spend the assets they acquire and can hold on to them indefinitely. The IRS is closely monitoring this issue, and Congress is considering legislation.
Certain types of gifts to DAFs such as gifts of stock in closely held corporations require expertise to navigate properly.
DAFs don’t make sense for everyone - DAFs have their down-sides, such as those described above, but they also boast a multitude of benefits to reap. Consider a donor advised fund if you meet any of these markers:
You are about to encounter a significant wealth event.
You are seeking an easy-to-use charitable vehicle to replace or complement a private foundation, or a streamlined way to make distributions from CLATs to many different charities.
You are seeking a simple, efficient, tech-savvy way to make charitable donations.
You are approaching retirement. Large donations made while one is still earning a high income gain greater tax benefits.
You seek privacy and may wish to donate anonymously.
You are planning a major liquidity event.
You want to involve your children or grandchildren in charitable giving and create a legacy of philanthropy.
You want to support your favorite causes and charities without the hassle of the managerial aspects of giving.
If your goal is to retain the utmost control over where your assets wind up, rain or shine, a DAF may not be your first choice.
In conclusion, a donor advised fund could be the vehicle for charitable giving you’ve been looking for. Make sure to be picky when comparing policies to ensure you find your best fit, and never hesitate to contact an impartial expert to help with these tough decisions. The Benevolent Vision Team is here to help!