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News & Views

Donor Advised Funds – Fabulous vehicles for focusing your charitable efforts
by Elizabeth Youngblood, JD - September 2007

 

 

Many of our clients are in the fortunate position to be able to give away a portion of their assets for the greater good of society.  We often find ourselves involved in discussions with our clients who are debating the best ways to channel their charitable intentions.  In the course of these discussions, we often define for them a popular charitable giving vehicle known as a “donor advised fund” or “DAF”. 


So, what is a donor advised fund?
The term “donor advised fund” is generally understood to refer to a charitable giving vehicle wherein an individual, family or corporation donates cash, stock or other assets; claims a tax deduction in the year of the gift for the gift’s fair market value; and later recommends how, when and to which charities money in the accounts should be distributed. 
These special accounts are housed within a charity known as a “sponsoring organization”.   These sponsoring organizations are generally local community foundations, nonprofit organizations, commercial sponsors such as the Schwab Fund for Charitable Giving, and independent sponsors such as universities.  
Once the funds are in the account, or donor advised fund, they can be channeled to one charity, a handful of specified charities, or, alternatively, as an endowment-type donation creating a legacy of giving over generations. 
The low start-up costs and flexibility of these vehicles has propelled the nation’s assets in donor advised funds to well over $20 billion.


Why use a DAF instead of simply writing a check to a charity?
A DAF allows a donor the opportunity to focus his or her charitable giving.  You can use the funds to accumulate assets and then research one or two projects to which to contribute, thereby maximizing and focusing your charitable impact.  You are allowed to claim a tax deduction for the full fair market value of the gift in the tax year you donate to the fund; yet, you can wait to actually grant the funds to a charity, or charities, once you have had the opportunity to select ones that are most appropriate for your gift giving intentions.  You can make as many grants you would like each year with the only restraint being the minimum grant amount (typically $100).  It should be noted that a sponsoring organization will normally require some sort of initial minimum donation to establish a DAF; the Schwab Fund for Charitable Giving, for example, requires a $10,000 minimum contribution.

 
Why use a DAF instead of setting up my own private foundation?

 

  1. Depending on one’s tax situation, a donor may take a higher charitable contribution deduction by donating assets to a DAF rather than to a private foundation.  
  2. DAFs are extremely easy to set up; they simply require the completion of a short account application. 
  3. DAFs tend to be more cost efficient than private foundations since the supporting organization handles any associated legal and accounting issues.
  4. DAFs also allow one to make grants on a confidential basis.  Private foundations typically are required to make their grants public. 

 

Can you spell out the tax advantages of a DAF?
A donor receives up to three tax benefits from a donation to a DAF:

 

  1. An income tax deduction in the year of the donation (with some limits based on one’s adjusted gross income for that year);
  2. Avoidance of capital gains, if the gift is of an appreciated asset held for more than one year; and
  3. Where applicable, a donation to a DAF would remove the assets from one’s estate and therefore, would avoid the imposition of all transfer and income taxes triggered by a donor’s death.

 

Note that the assets contained in a DAF grow tax-free.  In other words, one hundred percent of any investment growth on donated assets could go directly to charity.  This supercharges the impact of a donor’s initial gift. 

 

Does donating to a DAF make your life any easier?
The sponsoring organization performs many of the functions donors, especially those involved in private foundations, find tiresome such as the legal and accounting work.  So, for example, it is the responsibility and legal duty of the supporting organization to determine whether the donor’s selected charity conforms to IRS guidelines as a tax-exempt organization. 
The good news?  The donor gets to retain some of the fun.  You retain the right to recommend which charitable organizations receive grants, when the grants will be distributed and the amount of such grants.  We have clients whose children pick a charity every year and donate funds from the family’s donor advised fund.

 

How is your money invested until it is granted to a charity?
Investment options vary among sponsoring organizations.  There are a variety of approaches including the following:

 

  1. Broad investment choices – your investment advisor could continue to manage the investments until the funds are given to charities (this is usually only available for larger sized accounts);
  2. Mutual fund choices;
  3. Pools of mutual funds; or
  4. No investment choice – the sponsoring organization invests the funds for the donor.

 

Note that the Schwab Fund for Charitable Giving allows advisors such as The Tarbox Group, Inc., to create and actively manage a customized DAF portfolio for accounts with at least $250,000.  For smaller account sizes, we can help in building the portfolio using the solid fund options that are available.

 

Are there any downsides to using a DAF as my charitable giving vehicle?
There may be drawbacks to using a donor-advised fund.  Many of these drawbacks originate from the choice of the supporting organization used to house the DAF.   In particular, depending on the supporting organization, a donor may not be able to control or manage the funds’ investments.  Additionally, donor advised funds are not an appropriate vehicle if the donor wants to receive income from the donated assets, such as with a charitable remainder trust. 

 

How can The Tarbox Group, Inc. help?

 

  1. We can serve as an objective “sounding board” to help our clients define and shape their charitable intent.
  2. We can help clients choose the most appropriate charitable vehicle for their situation, which may include a donor advised fund.
  3. Analysis of which asset(s) makes the most sense to contribute is made easy by our knowledge of our clients’ balance sheets.
  4. We can tailor and actively manage an appropriate investment allocation of the funds invested in the donor advised fund until they are ready to be donated.
  5. We can assist in the due diligence of assessing which public charities fulfill the charitable intentions and wishes of our clients. 

 

We have typically housed our client’s funds within Schwab because there is complete transparency for our clients in trading and account statements.  The DAF account is linked with our clients other Schwab accounts.  This provides for straightforward reporting as well as an easy way to transfer securities between accounts as the donor client sees fit.  We have also helped clients form DAFs and make appropriate investment choices in other types of supporting organizations.

 

 

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