Should a Donor-Advised Fund Be Part of Your Estate Plan?
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Many individuals are interested in including charitable giving in their estate plans. This giving can take many forms. Oftentimes, a donor-advised fund can provide a very cost effective and easy way to give to charities, either during life or at death.
What is a donor-advised fund?
A donor-advised fund (DAF) is an account established with a Section 501(c)(3) charitable organization, known as a “sponsoring organization,” with the purpose of supporting charitable organizations over time. An individual, family or organization can contribute cash, securities, real estate or other assets to a DAF. The contribution to the DAF is considered a gift to charity for tax purposes.
Once the contribution has been made, the sponsoring organization has legal control over the assets, but the donor retains advisory privileges regarding how funds are distributed and how the assets are invested.
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DAFs can be established at most major financial institutions or with community foundations (charitable organizations that benefit specific communities).
How does a DAF work?
Donors can contribute to the DAF as frequently as they like and then recommend grants to their favorite charities whenever it makes sense for them, although some sponsoring organizations may require a minimum contribution and/or a minimum annual grant amount.
The gift to a DAF is irrevocable, and the funds cannot be returned to the donor or any other individual and only may be used for charitable purposes.
DAFs are the fastest-growing charitable giving vehicle in the U.S. because they are easy to establish and fund, and they could potentially have tremendous tax benefits. You can support almost any IRS-qualified public charity with grant recommendations from the DAF. The sponsoring organization is responsible for confirming that the charities qualify under the Internal Revenue Code.
Be mindful of the annual administrative fees, investment fees and maintenance fees when selecting the supporting organization to open your DAF.
What are the tax benefits of a DAF?
Income tax deduction. The donor can claim an immediate income tax deduction in the year the assets are contributed to the DAF, even if no assets are distributed from the DAF to a charity that year. The IRS does have some limitations on this deduction, depending on adjusted gross income (AGI):
- Deductions for gifts of cash cannot exceed 60% of AGI
- Deductions for gifts of securities or other appreciated assets cannot exceed 30% of AGI
- Deductions can be carried forward for up to five years
Investment growth is income tax-free. While an individual is deciding which charities to support, their donations can potentially grow in the DAF account, making more money available for giving. Any growth is income tax-free.
Reduced estate tax. Gifts made to a DAF will reduce the size of your taxable estate for estate tax purposes because any such gifts are subject to the unlimited charitable deduction.
How can I use a DAF in my estate plan?
You can contribute to your DAF during life, and you can also make a bequest in your will or revocable trust designating that the DAF receive either a specific dollar amount, a percentage or the remainder of your estate or trust after distributions. This is a very flexible way to fulfill your charitable goals without having to name specific charities in your estate planning documents.
If you choose to create a CRUT (charitable remainder unitrust) or CRAT (charitable remainder annuity trust), you might consider naming a DAF as the remainder beneficiary. In this way, you can take advantage of trust benefits and also provide flexibility for yourself and your heirs to change charitable beneficiaries over time.
You can also name your DAF as the beneficiary of a retirement account or life insurance policy.
Donors can select successor donor advisors (such as a surviving spouse or adult children) to recommend grants to charitable organizations from the DAF after the donor dies. In this way, a DAF can operate as a de facto family foundation by leaving a family legacy of giving and funds to enable the donor’s children to give to charity. If the DAF is established during life, the parents can also include the children in recommending charities that will receive distributions.
We recommend that you speak with your wealth planning advisers and your estate planning attorney to discuss if a DAF could be right for your family.
Tracy A. Craig is a partner and chair of Seder & Chandler’s Trusts and Estates Group. She focuses her practice on estate planning, estate administration, prenuptial agreements, guardianships and conservatorships, elder law and charitable giving. She works with individuals in all areas of estate and gift tax planning, from testamentary estate planning and business succession planning to sophisticated lifetime leveraged gifting techniques, such as grantor retained annuity trusts (GRATs), intentionally defective grantor trusts, family limited liability companies and qualified personal residence trusts (QPRTs). Tracy serves in various fiduciary capacities, including trustee and personal representative (formerly known as executor). She also works with clients on issues facing elders.
Emily Parker Beekman is a Wealth Planning Strategist at Corient in Boston. She works with clients and their advisors to develop and implement their estate planning, wealth transfer and charitable planning strategies. Prior to entering the wealth management field, Emily spent 10 years as a practicing trusts and estates attorney, where she assisted clients and generations of families regarding estate planning, estate and gift taxes, probate law, probate avoidance, estate and trust administration, philanthropy and specialized in estate planning for disabled persons, guardianship and conservatorship matters and long-term-care planning and other elder law matters.
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