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Donor-Advised Funds 101

Cupped hands asking for money, poor male beggar needs charity and help

Donor-Advised Funds 101: Giving USA 2017 recently reported that charitable giving continued to rise last year, with an estimated $390 billion donated to charitable causes.

The report found that total giving in the U.S. reached record levels for the third year in a row. This increase and the overall size of charitable contributions reveals how important charities are in our society. Total giving to charitable organizations amounted to 2.1% of the GDP. That is an increase of 2.7% in current dollars and 1.4% in inflation-adjusted dollars from 2015.

Traditionally, religious organizations see the largest share of charitable donations, with many of these contributions going to the donor’s local place of worship. The same was true in 2016, since there was a 3.0% increase in donations. Religious donations accounted for 32% of all donations, or $122.94 billion.

Have you ever heard of a donor-advised fund (DAF)? This increasingly popular method of giving may be worth considering for your own unique circumstances, especially if you want to make a bigger impact with your own giving, whether sacred or secular.

The Donor-Advised Fund (DAF)

The DAF is a philanthropic vehicle established by a public charity that enables you to make a charitable contribution, receive an immediate tax benefit and also advise the DAF regarding grants from the fund over time.

Some say a DAF is like a charitable savings account: a donor contributes to the fund (makes a deposit) when she wants and then recommends grants to her favorite charity when ready.

Here are the basic steps to a Donor-Advised Fund:

  1. You make an irrevocable contribution of personal assets;
  2. You get the maximum IRS tax deduction immediately (similar to giving directly to your favorite charity);
  3. You choose the name of your DAF account, select its current and successor advisors and the charitable beneficiary or beneficiaries;
  4. Your contribution is added to the DAF account where it is invested and grows tax-free; and
  5. At any time thereafter, you can recommend grants from your DAF account to any qualified charity.

A DAF is typically a separately-identified account that is maintained and operated by a section 501(c)(3) organization (known as the sponsoring organization). Each account is made up of contributions from individual donors. When the donor makes the contribution, the organization is legally in control of that asset, but the donor (or the donor’s representative) still has advisory privileges regarding the investment of account assets and the distribution of funds to charity.

DAF Abuse

The IRS is on the lookout for organizations that may misuse DAFs. These organizations – promoted as DAFs – may be established for the purpose of generating questionable charitable deductions and providing impermissible economic benefits to donors (such as tax-sheltered investment income for the donors) and management fees for promoters. Do your due diligence and make sure that you are working with a reputable and legal DAF.

In the end, be sure a DAF fits within your overall estate plan for you and your loved ones.

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