Donor-Advised Funds on the Rise

With 2017 drawing to a close, end of year giving quickly becomes a priority for many contemplating their yearly taxes. With the rise in Donor-advised funds, or DAFs as they are affectionately called, a growing number of potential donors are discovering a way to become philanthropically involved while receiving benefits unavailable with traditional methods of giving.

DAFs provide a current tax-deductible donation while giving the donor time to determine which charitable organizations to benefit. The number of DAFs are expanding due to the ease of starting, funding, recordkeeping and making charitable grants. Internet-banking style platforms allow donors to set up funds and make grants with just a few mouse-clicks and the costs are a fraction of other charitable vehicles, without the need to hire lawyers or fill out mountains of paper-work. End of year paperwork is also simplified with charitable giving recorded on one, instead of multiple, tax receipts.

Of course, there are some limitations. For one, IRA required minimum distributions do not receive taxable benefits when given to a DAF. A charitable IRA rollover (also known as a Qualified Charitable Distribution) is normally a nontaxable distribution if made directly by the administrator of an IRA to a qualified public charity. However, DAFs are not considered a “qualified public charity” for these distributions. Secondly, distributions from a DAF cannot benefit the donor or any of the donor’s family. This includes buying tickets to charitable events or fulfilling gifts, which are a legally enforceable obligation of the donor.

However, DAFs also provide numerous benefits. DAFs can be invested based on a donor’s preference, providing the potential to grow tax free, making available even more money for charities. Whereas tax laws require foundations to give out at least 5% of their assets each year, DAFs face no such condition, giving donors more time to weigh their options. Donations to DAFs also enjoy bigger tax breaks than those to foundations and non-cash donations are often easier to donate than with other charitable vehicles.

Because DAFs are sponsored by a public charity, policies, management fees, limitations, requirements and sun-setting rules can vary according to the sponsoring charity. In an article by USA Today, Seth Kaplan, a partner in the wealth preservation and tax planning group at Berger Singerman suggests that “people interested in finding a good DAF should ask around as they would for any other service, since there are thousands of community and commercial groups that host donor-advised funds. Find an institution with credentials that can provide basic financials as well. There's a certain amount of due diligence that's going to have to be done to make sure your money will still be there when you want to give it out."