Let’s first talk about the basics of a Donor Advised Fund (“DAF”) and then we’ll discuss some ideas about how they can be used.
DAFs are a relatively new phenomenon. Technically the first DAF was established by the New York Community Trust in 1931 – however it was not until the 1980’s that they began to come into the main stream. With that said, it wasn’t until 2006 – when then president Bush signed the pension protection act which provided more definition and clarity that DAFs began to take off in popularity. In 2015, there was an estimated 269,000 accounts holding approximately $78 billion in assets.[i]
According to the National Philanthropic Trust in 2017, there were approximately 463,000 account, holding an estimated $110 billion in assets. In 2017 alone there were contributions of over $29 billon and gifts of over $19 billion to operating charities.[ii]
So what is it? Think of a DAF as your personal charity … but not for you personally, rather a tool that allows you and your family to make gifts to other charities now or in the future. But the gift being made to the DAF today, as in deposited into the fund, is considered a completed gift to a charity and thus eligible to be deducted on your taxes even if no further gift is made to an operating charity. Yup, you read that right.
DAF’s are set up with “sponsors” such as Fidelity, Vanguard, and a host of other companies that operate and set them up. Just like setting up a personal account with your investment advisor, a DAF can be set up just as easily as well. Usually you open them either through some simple paperwork or through an online process. Once the account is established you can make a contribution of cash, stock, or other property as is allowed.
Just like any charity, a DAF can accept a gift of cash, but there are wiser ways to make the gift, such as appreciated stock, property, even shares in private companies or real estate can be handled, provided you check first with the administrator.
Let’s compare gifting cash vs. stock. For the purposes of this example let’s assume a $10,000 gift.
- If you write a check, it’s quick and easy and you receive the full deduction on your taxes for the full value … $10,000
- If you donate appreciated stock – the only caveat is, you must have held the stock for 12 months to get the full impact. Let’s assume you bought 100 shares of XYZ company 5 years ago for $50 per share or $5,000.Let’s say that today those same 100 shares are worth $100 each or $10,000. Now you gift those shares to your DAF. The value of the gift is the full $10,000. So where is the big benefit:
- The stock only cost you $5,000
- When you donate you pay ZERO capital gains – if you sold first and, assuming a 20% capital gains tax, you pay $1,000 in taxes, you’re left with just $9,000.
- The DAF gets the full 10k, not 9k so you pay less in taxes, you get the full deduction, and the DAF gets the full gift … truly a Win, Win, Win.
The above completed gift to your DAF can now be invested, if you wish, and future gifts can be made to virtually any qualified charity in America at the time and amount of your choosing.
You can decide to fulfill a gift today or make it over several years. Most DAF’s allow some of the following tools:
- To make a recurring gift
- To make it anonymous … or like Larry David, you can tell everyone you are anonymous.
- To make gifts now or in the future
- And to do research on charities in your field of interest. Maybe you want to focus on a disease – you can do research to find charities that align with your interests.
These are some of the basics of the Donor Advised Fund. In future blogs I will cover some more planning ideas, tax strategies, and even how to incorporate your family in your charitable giving.
Peter Lang – Managing Director – HighTower Westchester
914-825-8631 – firstname.lastname@example.org
[i] Wikipedia contributors. “Donor-advised fund”, Wikipedia, The Free Encyclopedia, 30 June 2019 13:47 UTC, https://en.wikipedia.org/w/index.php?title=Donor-advised_fund&oldid=90417884422 (Accessed on July 2019 19:46 UTC)
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