Donor-advised funds: Giving made easy and tax-savvy

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Americans are generous by nature with the highest percentage of giving done by individuals followed by foundations then corporations. To facilitate their charitable gifts, individuals are increasingly using donor-advised funds, which now hold nearly $80 billion in charitable assets.1

 

What’s a donor-advised fund (DAF)?
 

A DAF is a fund dedicated to your charitable giving. DAFs are offered by public charities, generally at community foundations or financial services organizations (the “sponsoring organization”), to make the process of giving easier and to help donors and non-profits maximize the gift.

The donor makes an irrevocable contribution to the DAF, and can generally take a charitable income tax deduction. Cash, stock or other assets may be accepted. As the donor, you or anyone you designate, have advisory privileges to:
  • Direct that some or all contributions to the account will be distributed as a gift or “grant” to a designated public charity,
  • Decide how money in the DAF will be invested.
Any portion of the contribution that isn’t distributed from the account to a public charity has the potential to grow tax-free. This is because the assets are the property of the charitable organization offering the DAF, which as a non-profit, does not pay income tax.

Using DAFs

Many people choose to use DAFs because they offer a number of distinct advantages in planning and making charitable gifts. Some of these include:
Ease of use: To support a specific charity or cause, donors simply contact the sponsoring organization with the amount of the grant, the charity to which the gift should be made, and when the transfer should occur. This may be done online or by telephone, depending on the organization.
 
Later, when you want to support a specific charity or cause, you simply contact the sponsoring organization and provide the amount of the grant, the charity to which the gift should be made, and when the transfer should occur. Generally, this can be done online, by telephone or through your local advisor, depending on the organization.
 
Less paperwork: DAFs make giving appreciated securities easy. Instead of completing extensive paperwork, you can simply transfer them directly to the fund where they will be liquidated, incurring no capital gains tax, leaving the full fair market value available for charitable purposes. Plus, because your deduction is based upon your initial gift not distributions from the account, you only have to track one gift (to your fund) instead of all the gifts that you may make over the year.
Taxes: The tax deduction for contributions to the DAF is similar to other public charities. Generally, there’s a calculation based on your adjusted gross income (AGI) and the type of asset contributed.

Timing: A DAF allows you to make a potentially tax deductible charitable contribution in a chosen year (perhaps when you have more income to apply the deduction) and hold the assets in your fund until you want to make a distribution from the account to a specific charity.
The benefit is that she took the charitable deduction in a year where she would have had a higher income tax, but she retained the ability to give the money over time instead of all at once. The ability to time the deduction is also useful to individuals that are retiring and will be in a lower tax bracket (and therefore benefit less from a deduction) or selling a business or have any other type of windfall in a particular year.

Who should consider a DAF?

A DAF can make giving both easier and more tax-efficient. Consider a DAF if you:
  • Have long-term appreciated stock or other assets, like real estate, that you want to use to fund your giving and want the ease of a professional that will liquidate them for you
  • Make cash gifts to numerous charities and don’t like the necessary record keeping
  • Make gifts to smaller organizations that don’t accept complicated assets
  • Don’t want to deal with tracking multiple gifts and ensuring compliance with IRS rules for each
  • Want flexibility to give to varying charities or to change charitable recipients over time
  • Are in a higher tax year and a charitable income tax deduction would have a larger impact today than in the future, but you’d like to spread out your gifts over future years

Pledges and Gifts

Your contribution to the DAF is considered an irrevocable charitable gift and legal control passes to the sponsoring organization, but you or a representative retain advisory privileges that allow you to recommend how gifts or “grants” are distributed.

Because these privileges are advisory, you cannot promise to make a charitable gift on behalf of your fund. Nor can your fund satisfy any legally-binding pledges that you have personally already made or may make in the future.
 
As an alternative, if you want to notify a charity of your intent to make a gift or a series of gifts through your donor advised fund, you can sign a “non-binding gift intention” or an “intention to give” statement. These are not legal pledges, but do alert your charity of your intended support.

Comparing donor-advised fund options

If you’ve decided that a donor-advised fund is for you, consider these questions when choosing a sponsoring organization:
  • What’s the minimum initial investment and for additional contributions?
  • What types of assets are accepted as contributions?
  • What investment options are available and does the donor retain the right to direct them?
  • Are assets separately managed or pooled with other funds, and who is managing them?
  • What’s the minimum dollar amount allowed for grants and how many are allowed per year?
  • Are there restrictions on the type or location of recipient organizations?
  • Must a portion of the funds be distributed to certain recipients?
  • What are the fees and expenses, to whom are they paid, and how are they used?
  • What recordkeeping is provided by the charity to the donor?
 

Establishing a donor-advised fund

For more information on DAFs as well as other strategies for charitable giving, speak with a TIAA advisor.
 
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1 National Philanthropic Trust, 2016 Donor-Advised Fund Report
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.

The tax information contained herein is not intended to be used and cannot be used by any taxpayer for the purposes of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Examples included herein are hypothetical and for illustrative purposes only and should not be considered as specific tax or legal advice.

Advisory services provided by Advice & Planning Services, a division of TIAA Individual & Institutional Services, LLC, a registered investment advisor.
 
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