Why to Consider a Donor-Advised Fund for Charitable Giving
From the desk of Mark Presteng, Private Wealth Advisor
Often people with significant wealth like pro athletes, movie stars, business moguls, and those that are charitably inclined will set up a foundation or a family foundation. While there are some advantages of using a strategy like a foundation, the financial means are often not large enough to justify the cost and maintenance.
Giving generously can have both charitable and tax benefits. However, what isthe right way to go about it? This will depend on your personal values, goals,and current financial situation.
One tool to consider for charitable giving is the Donor-Advised Fund (DAF). Allow me to explain what this financial strategy is and why you should think about incorporating it into your financial plan.
About Donor-Advised Funds
A Donor-Advised Fund is a charitable giving vehicle or a private fund for philanthropy. It is administered by a third party and created for the purpose of managing charitable donations on behalf of a family, an individual, or an organization.
Some third parties may have minimum contributions, but they can be as low as$1,000 to $10,000. Generally acceptable contributions can be cash, stocks, mutual funds, privately held stock, real estate, and bonds, as well as other investment instruments, depending on the third-party restrictions. DAFs have been around since the early 1930s, but the first commercial DAF became available in the early 1990s. The Pension Protection Act of 2006 added further definition and regulation of DAFs.
According to National Philanthropic Trust’s 2018 Donor Advised Fund Report, DAFs have grown in popularity over the past decade, accounting for 10.2% of total individual giving. There are now over half a million DAFs with $110billion in assets, and donors who have a DAF are giving away nearly $20 billion per year. So, why should you consider one? Let’s dive in.
Why to Explore a Donor-Advised Fund
The first reason to consider a Donor-Advised Fund is the tax incentive. The donor makes an irrevocable contribution to the DAF andcan take an immediate tax deduction. TheDAF can hold these contributions, reinvest them, or diversify a possibleheavily concentrated stock position into investment options that fit theinvestor’s timeline and risk tolerance. The owner of the DAF can choose to makegrants to charities at their discretion.
Contributing to a DAF in a tax year where income is higher can help with taxplanning. The DAF can help you avoid capital gains taxes by contributing highlyappreciated securities or assets. Establishing and contributing to a DAF canalso help avoid potential future estate taxes that may be owed. Once assets arecontributed to a DAF, they are removed from the value of an estate and avoidprobate.
Another advantage besides receiving the upfront charitable deduction and potential for your gifts to grow over time is that you get to decide when and how to give to the charities from the DAF. There are no requirements on how many grants you can or can’t make in a year from your DAF to a charity.
You are also able to set up successors to your DAF so that your family member or successor owner can continue your DAF, or you can choose to have it split to up to 10 of your favorite charities after your death. Passing on the DAF to your successors can be a great way to teach the next generation the importance of generous giving. What a way to leave a legacy for your family!
Donor Advised Funds are very simple to set up and establish, as they are low cost to maintain and don’t require legal fees to set up, but may have some limitations on investment options. A DAF may be a charitable giving vehicle that is appropriate for you. To learn more about DAFs, request a consultation with our team at TruStone Wealth Management.
MarkPresteng
CFP®, BFA™, APMA®, CLTC®, ChFC®, CKA®
Mark Presteng is a Private Wealth Advisor with TruStone Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, LLC in Grafton, ND. He specializes in fee-based financial planning and asset management strategies, and has been in practice for 20 years.
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