Establishing a donor-advised account helps donors facilitate and simplify year-end giving. And, because DAF accounts are set-up at publicly supported charities, your DAF account donation qualifies for the most advantageous tax deduction rules in a tax-friendly way. Donor-advised fund accounts are easy to establish. Once opened, not only can the account serve your immediate needs, but it is available for use as your charitable giving hub for years to come.
There are many methods and platforms for carrying-out your charitable giving. In recent years, however, one charitable vehicle has zoomed to the forefront of charitable planning – the donor-advised fund, or DAF.
Why? Because in addition to offering the most attractive tax deduction rules, donor-advised accounts provide flexibility other giving vehicles either cannot offer or offer only with additional complexity, and, often times, additional monetary costs and time commitments.
Since you are planning year-end gifts in any event, why not choose now as the time to open a DAF account?
The Tax Reasons
From a tax perspective, DAFs are attractive charitable giving vehicles. Donor-advised funds are programs of 501(c)(3) public charities. Since DAF programs are sponsored by a public charity, donations credited to a DAF account receive the most favorable tax treatment.
For example, since gifts to fund a DAF account are a gift to a public charity, they qualify for the 60% of adjusted-gross-income (AGI) limitation for cash gifts to public charities in the year of the contribution(s). Similarly, charitable gifts of long-term capital gain property to fund a DAF account, such as publicly traded stock, qualify for the 30% of AGI deduction in the year of the donation (and such property gifts allow you to avoid ever having to recognize gain on the disposition of the property).
The 60%/30% AGI gift rules applicable to a DAF account charitable gift compare favorably to the 30%/20% cash/certain long-term capital gain property AGI limitation on gifts to a private charity, such as a private foundation. In addition, most long-term capital gain property can be deducted at fair market value if gifted for the purpose of funding a DAF account. This is not the case of property to a private foundation. Only gifts of publicly traded securities to a private foundation qualify for a fair-market-value deduction (and there are some limitations to this rule).
A tax deduction is available at the time assets are contributed to a DAF account. That means that you can receive a current-year deduction for a gift made into your fund before December 31 even if you wait until the new-year to recommend any grants to charities.
Donor-advised accounts offer this beneficial treatment because a donor gives up all ownership interests in the contributed assets. The donor (and/or their appointees) receive the privilege of providing advice with respect to account assets. Donor-advised account donors and advisers have no legally enforceable rights with respect to assets in a DAF account. The DAF sponsoring organization has the right to decline to accept such advice, given that assets allocated to a DAF account are general operating, unrestricted assets of the sponsoring organization.
Many Benefits beyond Taxes
However, the tax benefit is only one piece of a much larger puzzle.
Take for example, the fact that you likely make gifts to multiple operating charities at year-end and through-out the year. If you support five charities, you write five separate checks. You receive a tax deduction letter from five different organizations. You need to separately track the donations and supporting documentation.
If, on the other hand, you open a DAF account and contribute to the account today, for tax purposes your donation is to one charity. You receive and must keep up with only one tax acknowledgement letter. The DAF sponsoring organization will supply you with a statement you can use to track which organizations you have supported, and the amount of that support.
An even greater simplification exists for donations of marketable securities and other property. Say there are five charities you wish to support at year-end, and you want to donate appreciated securities. That would mean five different sets of instructions to your broker. It also assumes all five charities are capable of handling property donations. If instead you establish a DAF account, you need deal with only one charity when making the donation, and virtually all DAF sponsoring organizations accept property gifts.
Once the DAF account is funded, you can request year-end grants be made to the five charities you wish to support. You only need to provide advice to one organization rather than writing and mailing five checks. And you can continue to receive recognition from the five charities for your support. To do this, simply request each charity be informed that the DAF account grant was made at your request.
Finally, though they require a much greater discussion, other charitable platforms also function well with donor-advised funds. Charitable lead trusts, charitable remainder trusts, simple bequests, and even foundations can all partner with a donor’s DAF in ways that offer great flexibility, simplicity, and tax savings.
All this means that, once established, your DAF is available for use as the core of your charitable planning.
Making a Donor-advised Account Work for You
Financial advisers and estate attorneys rightly point their clients toward donor-advised accounts as an effective charitable vehicle to incorporate in their planning. They do this not only for income and estate tax planning purposes, but because of the flexibility DAF accounts provide to their clients’ overall philanthropic plan.
In fact, few, if any, taxpayers with financial savvy are primarily motivated to make charitable gifts because of the tax deduction. And why would they be? The “savings” that come from charitable giving does not make giving tenable for people who wouldn’t also give for other reasons.
The mission-oriented nature of DonorsTrust offers an additional benefit. Our focus on donor intent protection and the principles of liberty means our clients can rest assured that assets held in a DonorsTrust account will be used only to further their principles that support the good of society.
This combination of benefits makes a DonorsTrust donor-advised account such a powerful tool for managing charitable giving, both at the end of the year and over the long term.