Using Donor-advised Funds to Achieve Your Charitable Planning Goals
Charitable & Philanthropic Services Manager
A donor-advised fund is a charitable giving vehicle that allows individuals, families or businesses to make an irrevocable, tax-deductible contribution of personal assets to a charity. The fund manages the assets and at any time thereafter the donor can recommend grant distributions to qualified charitable organizations.
This article discusses the benefits of donor-advised funds, or DAFs, and how they can aid your charitable planning goals.
Types of Donor-advised Funds
The two types of DAFs are endowed and non-endowed funds.
- Endowed funds are only distributed income leaving the principle invested for long-term growth.
- Non-endowed funds allow the donor to distribute income and principle.
How Donor-advised Funds Can Help
DAFs allow individuals to accomplish their charitable giving goals and take an immediate tax deduction. They give the donor flexibility with the timing of their donations. Donors can front load contributions in a high income year when the tax-deduction threshold for charitable contributions is higher. This allows for maximization of tax deductions while maintaining flexibility of timing of charitable distributions.
The Benefits of Donor-advised Funds
In addition to offering immediate tax deductions and donor flexibility, DAFs offer a number of benefits.
- Allows for giving anonymously
- Allows for the creation of an "In Memorandum" fund
- Conduit for donating appreciated securities to charities that might not otherwise be able to handle that type of donation directly
- Provides the opportunity for family to engage in the process of charitable giving
- Facilitates leaving charitable legacies after death. DAFs can be the beneficiaries of IRAs, wills or trusts should the decedent not want to name a charity directly
- Allows for the evaluation of charities' stewardship of funds over time
- No federal gift tax consequences because of the charitable gift tax deduction
- Minimization of federal estate tax liability because contributions to the DAF are removed from the donor's taxable estate
Income Tax Deductions Provided by DAFs
Contributions to DAFs are treated as a gift to a 501(c)(3) charity, therefore the deduction is the fair market value of the asset contributed. The deduction is limited to 50% of Adjusted Gross Income, of AGI, for cash and 30% of AGI for appreciated securities. There is a 5-year carryforward for unused amounts above the AGI threshold.
How DAFs Differ From Private Foundations
DAFs have lower start-up costs and ongoing administration expenses than private foundations. DAFs receive more favorable tax treatment than private foundations. They allow donors to take a federal income tax deduction of up to 50% of AGI for cash contributions and up to 30% of AGI for appreciated securities. This is compared to 30% of AGI for cash contribution and 20% of AGI for appreciated securities with a private foundation.
If you or your organization is qualified, donor-advised funds can offer a number of benefits. To learn more about donor-advised funds, talk with your First Citizens partner. If you don't currently have a partner, connect with us to get started.
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