There are many methods and platforms for carrying-out your charitable giving. Simplest, of course, is a direct cash gift to a charity of your choosing. More complex charitable giving usually involves an “intermediate” charitable vehicle as part of your charitable giving plan.
Common charitable vehicles are charitable remainder trusts, charitable lead trusts, private foundations and supporting organizations. 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, DAF accounts provide flexibility other giving vehicles either cannot offer, or offer only with additional complexity, and, often times, both additional monetary costs and time commitments.
The flexibility of donor-advised funds allow DAFs to serve as a one-stop charitable “hub” for your (or your client’s) charitable gift planning. We discuss some of the specific tax benefits of donor-advised funds in an earlier piece. Below, we’ll take a more specific look at how a fund can couple with other charitable planning vehicles to simplify estate planning and lifetime charitable giving.
Defining a DAF
Beyond tax, what are the other benefits of DAF accounts that make them so attractive? To answer this, let’s look at what a DAF account is.
A DAF account is (1) an “account” on a public charity’s books and records, (2) owned solely by the charity, (3) which is separately identified by reference to contributions of the donor or donors and, (4) where the donor, or a person appointed by the donor, has advisory privileges with respect to distributions from the account and/or investment of assets allocated to the account. Key to this definition is the fact that assets held in a DAF account are owned solely by the charity that sponsors the DAF program.
A tax deduction is available at the time assets are contributed to a DAF account only because a donor gives up all ownership interests in the contributed assets. The donor (and/or their appointees) merely receive the privilege of providing advice with respect to account assets. Donor-advised fund account donors and advisors have no legally enforceable rights with respect to assets in a DAF account. While these characteristics of a DAF account give rise to the tax deduction, they also give rise to the other beneficial aspects of a DAF account.
DAFS for Longer-Term Planning
Once established, your donor-advised fund is available for use as the core of your charitable planning. Below is a brief discussion of how a DAF account can function as the hub of your philanthropy.
DAFs and Charitable Remainder Trusts
A charitable remainder trust (CRT) is most often used to diversify appreciated assets in an income tax effective manner, allow for management of the assets in a tax-exempt vehicle, provide an income stream to you or another individual or individuals for a term of years or lifetime, generate a current income tax deduction, and provide for a future distribution to charity.
Charitable remainder trusts allow you to transfer appreciated assets to a trust, retain an income interest from the trust during your lifetime or for 20 years, and receive a tax deduction today for the calculated value of assets that are distributed to charity when of the income stream ends. (You can also give an income interest to someone else – though beware, as giving the income interest to someone other than yourself may generate a gift or estate tax.) The appreciated assets can be sold by the trust and reinvested, and no income tax is paid by the trust. Similar to a retirement account, income tax is paid by the recipient in the year distributions are made from the CRT to you or other non-charitable beneficiaries of the trust.
A DAF account is an optimal beneficiary of a charitable remainder trust (CRT).
Generally speaking, you must irrevocably name the charity(ies) that receive benefits from a CRT at the time the CRT is established, or increase the complexity of the CRT operations to maintain flexibility over the who the charitable beneficiaries will be. If, however, you name your DAF account as the CRT charitable beneficiary, you can easily provide advice to the DAF sponsoring organization concerning distributions from the account.
DAFs and Charitable Lead Trusts
A charitable lead trust (CLT) is the inverse of a CRT. A CLT pays an income stream to charity for a term of years and, once the term ends, any amount still in the trust is distributed to non-charitable beneficiaries. (Learn more about charitable lead trusts here.)
A CLT is a very effective estate planning vehicle that allows you to pass assets to the next generation free from estate and gift tax. However, similar to a CRT, you must “lock-in” the charitable beneficiaries at the time the CLT is established and funded.
If you name a DAF account as the CLT charitable beneficiary, it is possible to vary the charitable organizations that ultimately receive benefits (this is also true with a CRT). Since the income stream from the CLT is paid to a DAF account, the ultimate charitable beneficiaries depend upon the advice given to DAF sponsoring organization. This advice need not be locked in at the time the CLT is established.
DAFs and Your Estate Planning Documents
Many different documents can be termed “estate planning documents.” For example, if you have retirement account (e.g., IRA, 401(k), 403(b), etc.) and you completed a form designating an account beneficiary, that is an estate planning document. If you own life insurance directly and have designated the beneficiary of the policy, that is an estate planning document. If you have a revocable trust document that serves as a “will substitute,” that is an estate planning document.
Each and every one of these documents could have and very well may have named a charity as a beneficiary of your estate. But consider how much easier it would be to manage the charitable aspects of your estate plan if you open a DAF account, and your estate planning documents name only the DAF account as the charitable beneficiary.
Now whenever you want to change the ultimate charitable beneficiaries of your estate, you merely need to provide new advice to the DAF account sponsoring organization. No need for a trip to the attorney to change your last will and testament or your revocable trust. No need to call your financial institution for a new beneficiary designation form for your IRA account.
Instead, since each of these estate planning documents name your DAF account as the charitable beneficiary, you merely need to contact the DAF sponsor and change the final beneficiaries or your DAF account. This is both a time and monetary savings, assuming you would otherwise need to involve your attorney.
DAFs and Your Private Foundation
If you have a private foundation, a DAF can still play a central role in your year-end and all around charitable plan.
Different limitations apply to the amount you can deduct in the current tax year depending upon whether you contributed to a public or a private charity. For example, the currently deductible amount of cash contributions to a public charity, such as contribution to the organization holding your DAF account, is limited to 50% of your current year adjusted gross income (AGI). Cash contribution deductions limitations for contributions to your private foundation are limited to 30% of AGI.
The rules layer, though. So if you have maxed out current-year deductible contributions to your private foundation, by contributing to a DAF account you can increase your current year deduction.
And has your private foundation turned out to be more of a burden than it is worth? Are you tired of the administrative burdens associated with your private foundation? Then you should consider terminating your private foundation by rolling all of the foundation’s assets to your DAF account.
The Flexible Charitable Hub
Financial advisors and estate attorneys rightly point their clients toward donor-advised funds as an effective charitable vehicle to incorporate in their planning not only for income and estate tax planning purposes, but because of the flexibility DAF accounts provide to their clients’ overall philanthropic plan. As illustrated above, this flexibility argues that, for many donors, a DAF account can serve as the central hub of their charitable giving.
For liberty-minded donors, a DonorsTrust DAF account makes even more sense as a central hub for charitable planning. The mission-oriented nature of DonorsTrust makes it different, and 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.