Donor Advised Funds: A Great Way to Engage in Charitable Giving

Key Takeaways:

• A donor advised fund may be something to consider as a solution to meet your philanthropic objectives.
• Donor advised funds can be helpful for teaching younger generations about money, values and their role in the world.
• Donor advised funds can offer valuable tax advantages with far fewer administrative requirements and costs than a private foundation.
  

Another year has rolled around and you may want to make an impact. Are you thinking of ways to teach your children about money, values or their role in the world? Perhaps you had a big tax event this year and you’re dreading that April tax bill. Maybe you’re looking for ways to support certain philanthropic endeavors or causes close to your heart. Or, maybe you often search for the most advantageous incentives the tax code provides to mirror what mid-century judge and philosopher Learned Hand once said, “Anyone may so arrange his affairs that his taxes shall be as low as possible…there is not even a patriotic duty to increase one’s taxes.”¹

The good news is there is a way – a tool – to do all those things and accomplish a large chunk of them before the calendar turns over to the next year. That tool is a donor advised fund (DAF)(PDF, 73 KB).

A DAF is an account, owned by the sponsoring public charity, to which donors make irrevocable charitable gifts while retaining the advisory privilege to make grant recommendations over time to one or more qualified public charities. For income tax purposes, charitable contributions to a DAF are treated the same as contributions to any other public charity and therefore provide donors certain tax advantages in accordance with current tax law.

In our work with wealthy families, we’ve seen donor advised funds used in many ways and always with at least one positive effect. Sometimes a large income tax event will drive you to seek an equally large charitable income tax deduction. The beauty of a DAF is you can fund it all in one year, thereby providing a large charitable deduction in that single year while conversely allowing you to allocate those funds over many years. Once the DAF is funded, you and others whom you appoint as advisors steer the money from the fund to the public charities you want to benefit in the amounts you want to benefit them. Until the monies are paid out, they are invested and continue to grow for the benefit of the charities that will ultimately receive those funds.

It is often beneficial to begin a family’s philanthropic endeavors by defining the family’s values, arriving at a family mission statement and then using those cornerstones to navigate the choice of causes and organizations that will benefit from the family legacy.

The advisor role (or a co-advisor role) in a DAF is a great one to bestow on the rising generation, allowing them to get involved in philanthropy and gain experience in managing the distribution of dollars to charities and non-profits, particularly those in which they might have a keen interest. In addition, observing the impact charitable grants have on recipients is significant. Some families also create giving councils within their unit that allows groups of family members to present and discuss different charities as potential beneficiaries. Often, it is beneficial to begin a family’s philanthropic endeavors with defining the family’s values, arriving at a family mission statement (that everyone helps shape) and then using those cornerstones to help navigate the choice of causes and organizations that will benefit from the family legacy.

Many families consider a private foundation(PDF, 73 KB) for different reasons. However, a DAF can offer the same benefits as a foundation with much lower administrative costs, record keeping and regulatory compliance. A DAF can also provide higher income tax deduction limits. DAFs can be identified by using the name of the family funding the DAF or they can have an anonymous name so charities cannot discern the source of funding.

Another benefit of a DAF that is similar to a private foundation is it allows families and individuals to be purposeful about their giving. Rather than contributing to whichever charity might pique your interest or simply be the loudest on any given day, a DAF can force you to sit down at a certain time each year and be intentional about your charitable giving through family conversations and decision-making. It also enables you to share this process with charities that solicit your family so you can slow down and really consider how to move forward.

DAFs are streamlined in their ease of creation as well. Private foundations can take months to form and obtain IRS recognition; they can also be costly to establish. In contrast, DAFs can be set up within a few days, at no cost to the donor and may accept most asset types including cash, marketable securities or other property.

If charitable giving, family legacy planning and next generation preparedness are top priorities for you —and philanthropy is a core value —a DAF with the Comerica Charitable Trust may be the best option. Reach out to your wealth advisor to discuss philanthropic and tax-saving opportunities today or request to speak with a Comerica Wealth Management professional today.    

¹Helvering v Gregory  293 U.S. 465 (1935)  https://supreme.justia.com/cases/federal/us/293/465/