A neighbor recently posted in my neighborhood Facebook group seeking recommendations for local arts organizations for making end-of-year donations. Sometimes, the impulse to give exists before a suitable charity is on the radar of the person looking to make a gift. While crowd sourcing recommendations is one way to make such a decision, another option exists for people motivated to make a donation before deciding exactly which organizations should be on the receiving end: Donor-advised funds.
A donor-advised fund, sometimes referred to as a DAF, is a type of savings account for charitable giving. Once assets are transferred to a donor-advised fund, they can only be taken out of the fund via a distribution to a qualified charitable organization. There are no take-backs: The assets cannot be returned to the donor or transferred to any individual. Because a gift to a donor-advised fund commits the assets to a charitable purpose, the donor can deduct the charitable gift on the donor’s federal income tax return in the year in which assets are contributed.
What distinguishes a gift to a donor-advised fund from a direct donation is that the donor does not need to identify the charities that will receive the gift, or distribute the assets contributed to the donor-advised fund to a specific organization, at the time assets are transferred to the donor-advised fund. Instead, a donor can invest assets transferred to the donor-advised fund in different types of investment accounts, or leave the assets in a cash account, until they decide on the recipient organizations. Then, over time, the donor can direct that the assets invested in the donor-advised fund be distributed to qualifying charities. Once assets are contributed to a donor-advised fund, the investments can grow tax-free, similar to a retirement account. However, unlike a retirement account, the distributions are also exempt from income tax because the funds in a donor-advised fund can only be distributed to a qualifying charity.
A donor-advised fund is that it works a bit like a charitable foundation – funds are contributed up-front and distributed over time – but without the infrastructure. It also takes a lot fewer assets to set up an account with a donor-advised fund than it does to establish a private foundation, with initial investment minimums in the five-figures, rather than in the millions of dollars.
How attainable is gifting through a donor-advised fund? Consumer Reports has even published a helpful article for deciding whether a donor-advised fund is the right choice. That said, people swimming in oceans of money also use donor-advised funds. MacKenzie Scott, who used to be married to Amazon founder Jeff Bezos, made headlines recently for giving away mind-blowing (and life-altering) sums of money to charitable organizations. The New York Times reports that, in 2020, Scott gave away almost $6 billion to hundreds of charities – all through a donor-advised fund.
Interested in talking about how a donor-advised fund may fit into your estate plan? We’re happy to discuss!
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.