Tax Effects of Donor-Advised Funds

You’ve heard of donor-advised funds (DAF), but may not be fully aware of the rules and tax deductions. Let’s start at the beginning – what is a donor-advised fund? In simple terms, picture it as a charitable investment account that you open to support your preferred charitable organizations. The DAF is an easy way for you, the donor, to make significant charitable donations over a long period of time.

A question we often get asked is if a DAF is the same or similar to a private foundation. It is similar, yet different explains Donnie Laurence, Jr., Stone Oak Wealth Management’s Managing Director. “A DAF requires less money, time, legal assistance, and administration to establish and maintain. And the advantages don’t stop there as DAFs also have a greater tax advantage over private foundations.” The popularity of these contributions has grown as it allows donors to maximize the impact of donations while enjoying some tax benefits. According to the Lily Family School of Philanthropy, DAFs are among the fastest growing charitable vehicles in the U.S.

You’ll need to investigate your potential charity’s rules regarding DAFs; however, the following are pretty standard across the board:

• Contributions via DAFs are not reversible – the assets cannot be taken back once gifted
• Donors will have some advisory and grantmaking privileges
• There may be a required minimum contribution to start the DAF
• There is no ceiling limit to the amount you can donate
• Grants must go to a public 501(c)(3) nonprofit recognized by the IRS
• Donors can’t receive personal benefits from grantmaking

Tax advantages of DAFs

The first tax advantage is that the donor can generally take an immediate tax deduction of money or property donated to (or for the use of) the charitable organization. In short, the deduction is eligible for that tax calendar year. The amount of the deduction depends on several factors, including the amount of the contribution, the type of property donated, and the donor’s adjusted gross income (AGI). Generally, deductions are limited to 50 percent of the donor’s AGI. However for 2018 to 2025, the limit is increased to 60% for charitable contributions of cash to public charities.

If the donor makes a gift of long-term capital gain property (such as appreciated stock that has been held for longer than one year), the deduction is limited to 30% of the donor’s AGI. The fair market value of the property on the date of the donation is used to determine the amount of the charitable deduction. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.

Best of all, there are no federal gift tax consequences because of the charitable gift tax deduction, and federal estate tax liability is minimized with every contribution since donated funds are removed from the donor’s taxable estate. Also, DAFs are not subject to the excise taxes levied against private foundations.

Stone Oak Wealth Management deals with DAFs on an ongoing basis and we stay on top of any changes or additions to the advantages and benefits. We’ve taken the hassle out of setting up a DAF.  Ask us if a DAF is right for you.

Sources: Broadridge Investment Management Solutions

Stone Oak Wealth is regulated by the SEC as a registered investment adviser. Please see visit Legal Disclosures for additional advertising disclosures.