Volume 8 • Issue 11 • December 2018
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month’s issue will discuss a charitable planning opportunity known as the Donor Advised Fund. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
One myth of estate planning is that charitable giving is only for the super wealthy. However, a simple but powerful way that anyone, regardless of the size of their estate, can engage in planned giving is through a Donor Advised Fund (DAF). As many are now making year-end contributions and grappling with the changes brought on by the Tax Cuts and Jobs Act, consideration should be given to whether a DAF could help in your situation.
According to Forbes Magazine, DAFs “are fast becoming the most popular vehicle for charitable giving in the U.S.” A DAF is generally looked upon as an alternative to the much more complex and much more costly private foundation. Because of the increased complexity and cost, it is often inadvisable to establish a private foundation with an initial gift of less than $2 million. By contrast, depending on the institution, a DAF can be established with a gift of as little as $1,000.
DAF vs. Private Foundation – A Comparison
The following table shows some of the differences between a DAF and a private foundation:
|Donor Advised Fund||Private Foundation|
|Tax deduction limits for gifts of cash||60% of AGI||30% of AGI|
|Tax deduction limits for gifts of stock or real property||30% of AGI||20% of AGI|
|Excise Taxes||No excise tax of net investment income||Excise tax of 1% to 2% of net investment income annually|
|Valuation of Gift||Fair market value||Fair market value for publicly traded stock, cost basis for all other gifts, including gifts of closely held stock or real property|
|Required Payout||None at present||Must expend 5% of the net value of assets, regardless of how much the assets earn|
In establishing the DAF, a donor establishes and funds an account by making an irrevocable contribution to the charitable sponsor. The donor then recommends 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 usually then make the grant as recommended. The contribution is deductible in the year it is made to the DAF, not in the year the grant is given from the DAF. DAF holders can take a federal income tax deduction of up to 60% of adjusted gross income for cash contributions and up to 30% of adjusted gross income for appreciated securities. By transferring appreciated assets to a DAF, donors can avoid capital gains taxes and receive an immediate, fair-market-value tax deduction.
How It Works
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. After the initial start-up contribution, you determine how often and how much you would like to contribute. While you cannot “direct” the distributions from the DAF, the sponsoring institution will generally make every effort to follow your “recommendations” on how your account funds are distributed. DAF grants must be made to a legitimate non-profit organization or purpose. The grant cannot be used to pay a legal obligation or for anything that will benefit you directly. For example, a DAF grant could not be used to fund a gift to the University booster club if you were receiving season tickets in return. Under certain circumstances, a DAF grant could be used to help fund a mission.
For example, a giving scenario could look something like this:
Jim and Susie are great supporters of several different tax exempt organizations. However, their gifts are sporadic and they want to make charitable giving a more focused part of their lives and the lives of their children. They contact a sponsor of a DAF and establish the Jim and Susie DAF. They make an initial contribution to the Jim and Susie DAF of $5,000 in December of 2018. The $5,000 gift is deductible on Jim and Susie’s 2018 tax return. The DAF sponsor invests the $5,000 gift and the amount increases based upon the success of the investment. In the spring of 2019, Jim and Susie receive a letter from Utah Public Radio (UPR) concerning their annual fund drive. Jim and Susie enjoy public radio so they convene a family council to discuss their support. The family agrees that they would like to give a gift to UPR in the amount of $250. Jim and Susie then “recommend” to the DAF sponsor a distribution of $250 to UPR. The DAF sponsor then sends a “grant” from the Jim and Susie DAF to the station. The balance of the original contribution, plus any income generated, remains in the DAF account for future distribution upon the recommendation of Jim and Susie.
One of the benefits of a DAF is the ability to maintain privacy. In contrast to other forms of giving, DAFs allow account holders to determine what information is disclosed to the charitable organization receiving the gift. The donor has the option of remaining anonymous.
Establishing a Legacy of Giving
A DAF is a powerful tool to engage your family in the serious and thoughtful pursuit of a philanthropic life. Your children, grandchildren, etc. can be involved in establishing philanthropic goals and determining how DAF funds are distributed. Family members can be encouraged to contribute their own resources to the DAF. A DAF can exist in perpetuity, meaning it can survive your passing. The donors can name advisors and successors from inside or outside of their family to continue the legacy for generations to come.
The United States is a nation of givers. People give for a variety of reasons and do so in a variety of ways. Scientific studies have proven that “giving” elevates our levels of personal satisfaction and health. Studies also indicate that giving elevates individual income. Most religions teach giving to others as a way to show gratitude. Whatever your reasons, there is truly no downside to giving back. Donor Advised Funds offer one opportunity to establish a philanthropic life in an administratively easy fashion with a low initial investment. Please contact us to discuss this and other methods of planned giving.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.