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

Americans are generous by nature, giving more than $358 billion to charities in 2014.1
 

Interested in contributing to multiple charities throughout the year and don’t want the tax-deduction paperwork associated with claiming those gifts? A donor-advised fund (DAF) might be a good solution for you. DAFs offer the flexibility to contribute to your fund and take the deduction in the contribution year, and delay the gifts to the charities until later years. So, you may establish the DAF in a high-income year for the deduction and defer gifts until a later time.

What’s a donor-advised fund?
 

Generally, a donor-advised fund is a separate fund or account maintained and operated by a 501(c)3 public charity, most commonly associated with a financial institution or community foundation. The managing organization is called a “sponsoring organization.”
The DAF account is composed of contributions made by individual donors. Once you make a contribution to the DAF, it’s considered an “irrevocable charitable gift.” That means the sponsoring organization has legal control over it. You or a representative you choose to act on your behalf still have advisory privileges that allow you to indicate how gifts, or “grants” will be distributed, as well as how money in the fund will be invested.
Funds you contribute grow tax-free, since they become the property of the charitable organization.

Why consider a donor-advised fund?

A DAF can make giving both easier and more tax-efficient. Consider a DAF if you:
  • Want flexibility to give to varying charities or to change beneficiaries over time.
  • Want your spouse, children, and grandchildren to be involved in your family’s legacy over successive generations.
  • Make cash gifts to numerous charities.
  • Make gifts to smaller organizations that don’t accept complicated assets or track multiple gifts.
  • Don’t want to deal with tracking multiple gifts and ensuring compliance with IRS rules for each.
  • Have a spike in income or are about to retire and a charitable income tax deduction would have a larger impact today rather than in the future.
     

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.

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, and leaving the full fair market value available for charitable purposes. This is particularly useful for donations to small or unsophisticated charities that may not have a staff to deal with these types of transactions.
 
Streamlined paper work gives you a hassle-free, low-cost approach to managing charitable gifts. Another advantage is that the tax deduction to the DAF is similar to other public charities, generally a calculation based upon your adjusted gross income (AGI) and the type of asset contributed. As a result, many families are now considering such funds in lieu of private foundations.

Tax advantages

A DAF allows you to separate the timing of your tax deduction from the gift to the charity. In other words, you may make a charitable contribution to the fund and receive the corresponding deduction immediately. However, you can hold off on making the actual gift to the charity. This can be useful if you want an income tax deduction in a certain year, such as during high-wage years, or during years when you earned a large bonus or recognized a gain from the sale of a business, security or other asset, but want to spread out the gifts to the charities over a longer period of time.

Because a donor advised fund is classified as a “public charity”, you can usually deduct more of your donation than if you donated to a non-public charity such a private foundation.
 

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 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, you have some decisions to make when it comes to choosing a sponsoring organization. Here are some questions you should ask:
  • What’s the minimum initial investment and for additional 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

Establishing a DAF allows you to make tax-deductible donations with less paperwork and fewer administrative burdens than those associated with creating a private foundation. For more information on DAFs as well as other strategies for charitable giving, speak with your TIAA advisor.
 
1 Giving USA: Americans donated an estimated $358.38 billion to charity in 2014; highest total in report’s 60-year history. (http://givingusa.org/giving-usa-2015-press-release-giving-usa-americans-donated-an-estimated-358-38-billion-to-charity-in-2014-highest-total-in-reports-60-year-history/)
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TIAA-CREF, its affiliates, and their representatives do not give tax or legal advice. We suggest that you contact your legal advisor about your planning needs.
 
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. It was written to support the promotion of TIAA-CREF Individual Advisory Services and TIAA, FSB. 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.

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