Donor-Advised Funds Make Giving Easy and Effective
June 01, 2004Many of our clients make charitable gifts to worthy philanthropic causes over the course of their lifetimes. Recently, there has been growing interest in a particularly flexible tool called a donor-advised fund. A donor-advised fund (DAF) is an account that is set up to receive cash or assets that will eventually be given to charitable organizations. The individual creating a DAF receives and immediate income tax deduction for the assets contributed and then gives the money to selected charities over time and in the desired amounts.
DAFs are easy to set up and are often used in the context of advanced planning for income and estate tax savings. For example, assume Mary is expecting a $200,000 capital gain in 2004 on the sale of stock. She normally makes $20,000 of charitable contributions each year to a handful of organizations. What if Mary were to set up a DAF with $100,000 of appreciated stock to “front load” some charitable deductions into the current high income tax year? Depending on her income levels, Mary may be able to eliminate the entire tax on the stock sale just by planning ahead for her charitable giving. For the next five years, Mary advises the DAF to distribute the $20,000 to her favorite charities.
For Mary, the DAF is a grand slam due to: 1. Making a difference for selected charities as planned, 2. Receiving a current tax deduction to offset taxes on the stock sale, 3. Having no taxes due on capital gains for the stock contributed, and 4. Reducing the value of her estate due to the charitable gift.
In many ways the DAF operates like a “mini private foundation” but without the paperwork, excise taxes and general administrative headache. It can be a great took for teaching philanthropy and grant-making to younger family members. Think of a donor-advised fund as a personal “giving account” and consider whether or not this unique tool could make a difference for your family.
