A Donor Advised Fund

A Donor Advised Fund

Simply speaking, a Donor Advised Fund (DAF) is an account held by a public charity, which, by agreement with the public charity is distributed out over time to charitable institutions upon the advise of the donor. The DAF is the “poor man’s” substitute for the private foundations established by the very rich.

Most public charities (THEDENVERFOUNDATION,THECOLORADO CHILDREN’SHOSPITAL, THE SUMMIT FOUNDATION, and most colleges and universities) will accept donations as an establishment of a DAF. In addition, many mutual fund managers (VANGUARD,FIDELITY, etc.) will accept donations as an establishment of a DAF. The agreement with the public charity is that they will allow the donor to advise them as to how to invest the funds and as to how to distribute the funds to charitable institutions. Legally, once the funds are donated to the public charity, that public charity has complete control over the funds and the donor can only advise as to investments and distributions. Practically, the public charity will invariably follow the advice of the donor. The benefit to the donor of a DAV is the immediate taxable deduction for the donation.

Generally, the minimum for establishing a DAF is $50,000. If made to the public charity, the entire $50,000 is immediately deductible (within the annual limits allowed of 60% of one’s AGI). The donor can than make annual contributions from that fund and from its earnings to various charities.
If the annual contributions average 3% to 5% of the value of the DAF from time to time, the number of years that donations can be made from the DAF would be virtually unlimited. The ability of the donor to provide to charities would, then, extend to the children and grandchildren of the donor. Once established, additional funds could be added to the DAF an desired.

This is an excellent way to teach one’s progeny the importance that the donor places on charitable giving while allowing the progeny to make the choices as to how much to give and when. The benefits are increased if the initial gift to the charity is made with appreciated property, for the capital gains on the appreciation would be recognized, not by the donor, but by the charity (which pays no tax).

Furthermore, under the current federal tax regime, with the increase in the standard deduction, a DAF can be of substantial use. By making a large lump sum donation in one year, and using DAF to make contributions to charities in later years, the donor would be able to utilize the itemized deduction in the year of the contribution while taking the (now substantial) standard deduction in later years.

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