What is a donor advised fund (DAF)?

Many people think of a donor-advised fund (DAF) as a savings account for philanthropy. In many ways, they work the same as a 401k (a savings account for retirement), or a 529 account (a savings account for funding higher education costs). Like any of these savings accounts, they are designed to accumulate in value for the benefit of a future expenditure.

Other DAF structures are emerging too, such as programs that can be funded by payroll deductions, and programs that espouse social responsibility (CSR) in corporate America.

Donor advised funds are simple to open, provide a charitable tax deduction whenever money goes into the account, and are easy to grant/gift money to a favorite cause when the donor is ready to do so.

There are different flavors of DAFs, and they’ve been around actually for more than 30 years. They got their start at local community foundations where they were established to support geographically local causes. Quite a few DAFs are associated with financial institutions — their differentiated offer often provides a variety of investment options while donors are deciding who to gift to. And DAFs are popping up at colleges/universities and many other charities across the country with programs for their most loyal supporters.

Situationally, a donor-advised fund might be the best option for managing the charitable aspects of a large financial or life event, such as a bequest, a business merger or IPO, or the gift in-kind of a large asset that a philanthropist is not inclined to gift to a single non-profit, such as real estate.

The details of DAF programs are readily available from every DAF for the asking. Financial advisors should know about DAFs (but not all do…) and can help with increasing awareness with their clients. And no doubt you know some friends and colleagues that have a DAF and can give you their insight into how they work.

A great deal of information has been written about DAFs, so learning more about this popular charitable giving tool is pretty simple too.

Can I donate appreciated assets to my DAF?

YES! Appreciated assets are often the best, most tax-advantageous assets to give to a charity, DAFs included. Given the benefits and nuances of some of the rules around their tax deductibility, you should get advice from your CPA or tax advisor, as capital gains assets (business interests, real estate, cryptocurrency) can be great gifts, while appreciated tangible personal assets (wine collections, cars etc) offer good, yet different benefits to the donor.

Each DAF, and charity for that matter, has their own rules regarding the assets they’ll accept and the process they go through in facilitating gifts of non-cash assets. Their policies are generally wrapped in something called their gift acceptance policy, and each organization is free to write theirs in any way they wish. So check with your DAF or charity before you get too far down the path of gifting your assets. None of them should actually say “no, we don’t want your stuff”, though they may have different ways of facilitating the gift, including partnering with another charity to accept the initial contribution.

And regarding assets you may consider donating as part of your bequest and estate plans, it would be prudent to advise your DAF/charity of your intention while still alive. In that way, if your DAF doesn’t accept real estate gifts, for instance, and which is not uncommon, they can help you support their mission by advising you on alternate ways to make that gift on your passing. They will certainly be grateful for the gift, and crafting an efficient gift plan for that asset will help avoid legal situations and facilitate making your generous intent a reality for the charity/DAF of your choice.

Can I direct that the securities and other asset(s) I give “in-kind” to my DAF be held and liquidated on a certain schedule into the future?

You can ask, but no, you can’t place any kind of restriction or control on how the DAF manages their assets. The fact is, when you received your tax deduction for your charitable gift to the DAF you gave up ownership and control. The asset is no longer yours – it is owned by the charity. The DAF may well be advised to listen to your counsel in order not to devalue your gift, but they still must have the decision-making responsibility. If you have concerns about the valuation of an asset if it were to be sold too quickly, discuss that with the DAF. My guess is that they’d want to find a way to maximize its value as much as you do.

Can a Donor use the funds from their Foundation or Donor Advised Fund to purchase tickets for a charity gala or event?

• No (and yes). This nuanced topic of granting from a donor-advised fund is often referred to as the “bifurcation” of a grant or gift and flags any “personal benefit” that may be received by the donor as problematic. While currently under review by the IRS, grants from DAFs that result in more than an incidental benefit – such as this bifurcated tax situation – are generally not allowed. Grants from DAFs to a charity must be 100% fully deductible under the current language and regulations of the IRS.
  • For instance, if a donor buys a table at a gala (or a tee-box at a golf event etc.) and receives something of consequence in return – like the ability to seat 8 friends around the table for a free meal, or a free entry to the golf event – that return back to the donor is viewed as a personal benefit which is not tax exempt. The gift of a table at a gala in this case goes to cover some event expenses – the tax-deductible portion of the gift – and a non-deductible portion that provides a personal benefit. (“Bifurcate” – to break into two parts).
  • Example – assume a gala event table of 10 seats is $1000 – and the charity has determined that the gift is 75% tax-deductible ($75 of each seat goes to offset costs for the event, and each participant – including the donor – is receiving a $25 meal for free).
• The recent IRS Notice 2017-73 provides some interim guidance and directional thinking as the IRS works towards new regulations on this and a few other DAF matters. Under consideration is the possibility for a DAF to fund the tax-deductible portion of the event ($750 in the example above), and the donor separately to fund the portion that they would have received as a personal benefit ($250) if they had paid for the full event/table cost.
• (and yes);grants may be made to offset event expenses in full in which there is no split of the tax deductibility of the gift. If there is no personal benefit, maybe the donor has no intent to attend the gala nor take advantage of any benefit offered, the gift is likely to be approved by the DAF.

Can I donate to my DAF as part of my estate plans?

Yes, and this happens quite frequently. If no prior DAF account exists for you, your executor will have to get that done. As DAF programs can change from time to time, it is often a good idea to check with your DAF to let them know of your intentions to be sure they are aligned with the offerings and terms of that DAF.

Can a donor roll their Charitable IRA transfer into a Charitable Gift Annuity (CGA)?

• The Pension Protection Act of 2006 specifically carved out tax free distributions from an IRA to a CGA. A donor may still use a distribution from an IRA to fund a CGA, but the funds must be received by the donor (ie. constructive receipt and liable for income taxes) and then sent to a charity by the donor to fund a CGA. With the normal tax deductible benefits afforded to a donor by a CGA gift, the tax liability of the IRA distribution may be partially offset.
• Technically, “The exclusion from income applies only if a contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations.”* Thus, split interest gifts of any type do not qualify since their funding has deduction percentage rules.

*From the PPA 2006 language

What happens to the funds held in donor-advised accounts upon the passing of the account advisors?

Let’s start by being clear on two terms that can be confusing: Donor-advised funds (DAFs) are a type of giving vehicle hosted by charitable organizations; these organizations hold a collection of donor-advised accounts (DAAs). You and I can open a donor-advised account at a charity that operates a donor advised fund.

DAFs today offer donors a variety of succession or advisor end-of-life options for their accounts, which are almost always defined in the hosting organization’s terms and policies (that fine print we agreed to when we signed on to open a DAA). Unlike private foundations, DAF accounts are not designed or intended to last in perpetuity.

Who gets to decide what succession options are applied to the DAF Account?

The current advisor(s) of a DAA — again, within the terms of the program — can change the succession plan at any time. This is a common right of the “advisor,” as these are donor “advised” accounts.

Can a DAF be directed to follow the wishes of the original donor beyond his/her lifetime, similar to the terms seen in private foundations?

Ah, “control from the grave,” as I used to call this. DAFs are certainly within their right to allow continued direction as requested by a (now-deceased) advisor, but the burden of managing the possible variations can add expense to most common DAF models. While there are ways it can be handled, depending on the particular request, it’s not usual.

What if an advisor opens a DAF account and then finds he/she doesn’t like the succession options offered?

Therein lies one of the very interesting dynamics of DAF programs: If an advisor doesn’t like the terms of the DAF where they have opened an account, it’s usually not difficult to exit that particular program. As most DAFs allow account holders to grant funds to a wide variety of charities – other DAFs included – the dissatisfied account advisor can simply request a grant for the account assets to be issued to another DAF with terms that are more aligned to their interests.

Some DAF terms, often seen at college/university and other single mission DAFs, require a certain percentage of the account balances to remain at their institution, and so grants for only the remaining balance of their funds may be directed to an alternate DAF.

How do I arrange a gift from my DAF during my lifetime?

It is possible for donors to make gifts from their DAFs either during their lifetime or when the fund terminates. For current gifts, donors should notify their fund administrators (using the Standard Distribution Form) that they would like to make a distribution to your organization.

How do I arrange a gift from my DAF when the fund terminates?

Donors can contact their fund administrators and request a copy of the Change of Beneficiary Form. This can be filled in as the donor wishes and include your organization for a portion or all of the remainder of his/her fund’s assets.

What are the tax implications of a gift from my DAF?

Because they’ve already relinquished control over the DAF assets and claimed an income-tax charitable deduction when the donors made their gift to the fund, there are no tax implications of this additional transfer from the fund to your organization.

Can I direct where the fund makes distributions in the future?

Not exactly. Donors have the right to make recommendations about the amount, timing, and recipients of DAF grants, but the trustees can override their advice. As a matter of practice, the trustee will often follow the donor’s advice regarding grants so long as the recommended charity is qualified to receive DAF distributions and the grant amount is acceptable.

How will I provide the advice to the DAF?

The DAF trustee or administrator will provide donors with the necessary paperwork to make their recommendations each year.

Can I use DAF funds to satisfy a pledge?

No. Donors may not use DAF funds to satisfy a preexisting, legally binding pledge to any nonprofit organization, including your organization.

Will I get a new deduction each year a distribution is made?

No. Donors will receive a charitable income-tax deduction for the fair market value of the assets the donor uses to create their DAF and for any future contributions to the DAF, but the donor will not receive additional deductions for grants made during the DAF term or for the distribution to the remainder beneficiary.

What are some of the most common offerings for the succession plans of a DAA?

Within the options offered by most DAFs, there are three very common succession plan choices named by advisors for their DAAs:

1. pass the account responsibilities to the person(s) of their choice (often called the successor advisor);
2. immediately distribute the balance in the account to one or more charities; and
3. direct the balance to be distributed at the discretion of the hosting DAF, most often by applying the dollars to a fund or funds under the control of the trustees.

There are hybrids, too; whether a combination of these, or possibly the creation of a new endowed account within the DAF that has a clear payout plan, over time, to a charity or charities. DAFs have the right to create their own policies here; like placing a limit on the number of successor generations that may play out from (1) above, and limiting the charities the DAF will make grants to.