04.27.10

Using Donor-Advised Funds for Your Charitable Donations

by Rebecca Rohe

Donor-advised funds (DAFs) are becoming the vehicle of choice for facilitating charitable donations. While private foundations are still popular with donors, the complexity and administrative burdens associated with private foundations are steering more clients towards using DAFs. The Fidelity Charitable Gift Fund (the nation’s largest DAF) received over $1.1 billion of funds in 2009 for charitable purposes.

A DAF is an entity to which donors make tax-deductible contributions to a third-party administrator. The administrator is ultimately responsible for determining how the contributions are invested, ensuring compliance with all legal and tax requirements, and determining the charitable recipients. The donor usually has the ability to provide input on the investment choices and always has the ability to make recommendations regarding the charitable recipients.

While DAFs charge an administrative fee for the services provided, many donors are happy to be relieved of these tasks and instead be allowed to focus their time and efforts on advising on the charitable recipients.

Since the donor’s contribution to a DAF (which is a qualified charity) is irrevocable, the donor receives an income tax deduction when the contribution is made to the DAF. The timing for the charitable deduction is not dependent on when the DAF disburses the funds to the qualified charities. This strategy would be particularly helpful to a donor who experiences an unusually large income event (e.g., sale of a company) in a year but is still unsure about which charities to benefit and may require more time to decide.

The application process for setting up a DAF is easy and can usually be completed online. DAFs can often be set up with as little initial funding as $5,000. Most DAFs accept contributions of cash, marketable securities and even restricted assets under certain conditions.

There are numerous advantages to setting up a DAF over a private foundation including the avoidance of legal fees, the avoidance of accounting fees, the ability to make anonymous donations, and the simplified record keeping. DAFs also enjoy complete tax-exempt status regarding investment income whereas private foundations are usually subject to tax at a rate of 1% or 2% on investment income. DAFs also provide donors with an increased chance of realizing a higher income tax deduction in the year of donation. Cash contributions to a DAF are deductible up to 50% of the donor’s Adjusted Gross Income (AGI) but cash contributions to a private foundation are only deductible up to 30% of a donor’s AGI.

Please consult a member of Argy’s Family Wealth Management team if you would like to discuss whether using a DAF is appropriate for your situation. The author, Rebecca Rohe, is one of Argy’s Family Wealth Management Partners and can be reached at 240.485.0864 or rrohe@argy.com.

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