As I have written in the past, a donor advised fund (DAF) can be a great tool in your charitable, estate, and tax planning. A DAF is an account established and funded by a donor making an irrevocable contribution to the charitable sponsor. The donor can then recommend the investment strategy for the funds within the parameters allowed by the sponsoring institution. When the donor is ready to distribute to a charitable organization, a recommendation is made to the sponsoring institution which will then normally make the grant as recommended. The contribution is tax deductible in the year it is made to the DAF, not in the year the grant is given from the DAF. If you do not have a significant amount to give to a charity presently, the DAF can act as a philanthropic nest egg which you build over time.
DAFs can also be a useful tool in your exit or succession planning strategy. In addition to a tax deduction for the charitable contribution, a DAF can also be used to minimize the impact of capital gains taxes on a transaction. Properly structured, a donor will incur no capital gains on a gift of appreciated assets to a charity. Appreciated assets could include, among other things, securities, real property, and shares in a closely held business. A business owner seeking to exit her business may be faced with stiff capital gains taxes as a result of unrealized gain that has built up over a number of years. She can reduce these taxes by donating some of the shares to her DAF. The DAF can then sell those shares to the purchaser as the owner sells her remaining shares to the purchaser. Up to applicable limitations, she will receive a tax deduction for the gift. In addition, there will be no capital gains on the sale of the shares gifted to the DAF which will reduce the amount of taxes paid by the owner and increase the amount ultimately received by the DAF. She is then free to recommend distribution of the funds in the DAF at such times and to such charitable organizations she sees fit.
A word of WARNING! As with other charitable strategies of this kind, the donation should be made while the terms of the sale are still under negotiation. If the transaction has proceeded too far, it could result in the donor bearing the tax liability for any gain on the sale. There are other technical restrictions that apply, so using qualified advisors is crucial. Additionally, not all companies that sponsor DAFs will accept these types of business interests as contributions. Therefore, you should investigate the willingness of the sponsor to cooperate in the transaction prior to establishing the DAF.