Charitable giving is often a key pillar of estate and legacy planning for many investors. If philanthropy is important to you, consider the following details of donor advised funds and evaluate if they make sense for your plans to support causes that matter most to you.
What is a donor advised fund? A donor advised fund (DAF) is a monetary fund or charitable account managed and operated by a sponsoring organization, commonly a 501(c)(3) nonprofit, religious or financial entity. Contributors to a DAF make an irrevocable donation to the fund that is managed by an investment professional in accordance with the fund’s long-term goals and objectives. The donor is then able to advise the fund manager on which organizations and grants to allocate the money to.
What can be donated to a DAF? One of the attractive features of a donor advised fund is that multiple appreciating asset types, such as publicly traded securities, mutual funds, restricted stock and cash can be donated to the account.
Why utilize a donor advised fund? In addition to the possible upside on invested assets, potential tax advantages for donors and charities alike are another DAF benefit. Because this type of fund is typically professionally managed and operated by a section 501(c)(3) organization, the donated assets can appreciate tax-free over time, therefore increasing the value of funds that can be distributed to grants and organizations.
Beyond having access to investment professionals, donors can generally take advantage of an immediate tax deduction on the amount of assets contributed, even if the funds are not going to be allocated directly to the intended charitable organizations until future years. Cash contributions are eligible for a 60% deduction of your adjusted gross income. Other assets may be eligible for up to 30% of your adjusted gross income. Be sure to work with a CPA or tax adviser to determine the most effective way to give to a DAF.
What are the downsides of donor advised funds? There are three main limitations of donor advised funds that are important to keep in mind. To start, there are administrative costs for donor advised funds. The cost for management of different funds can vary, but it is important to understand cost structures to determine if the benefit of having professional management outweighs any administrative costs.
Depending on the donor advised fund that you chose to utilize, there may be restrictions on the organizations or grants you can support. While donor advised funds allow investors to maintain a relationship with the fund management as an adviser and make recommendations on where to direct the donation, the investment professional will ultimately decide what causes to support.
Lastly, contributions to a donor advised fund are irrevocable. Once you allocate assets to a DAF and a sponsoring organization, they no longer belong to you. It is important to work with a financial professional to determine the appropriate amount and asset types to donate to a fund, so that you can do so with confidence.
A donor advised fund may be an advantageous way to support charitable causes that align with your passions and can ultimately make a difference for those in need. Consult with a financial professional and your tax adviser to determine if a donor advised fund is right for your financial plan.
Chris Thompson, CFP ®, CMFA ®, CRPC ® is a Private Wealth Advisor and Managing Director with Ameriprise Financial Services, LLC. in Ponte Vedra Beach, FL. He specializes in fee-based financial planning and asset management strategies and has been in practice for 31 years. To contact him, www.ameripriseadvisors.com/chris.thompson, 904-380-2290 at 818 A1A North, Suite 30, Ponte Vedra Beach FL 32082.
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