Donor Advised Funds: Maintaining Control and Doing it My Way

Remember Frank Sinatra’s 1969 hit, “My Way”?  My Way is much like the aspiration of donors who are motivated to give, but want to “do it their way” by maintaining control of the assets they intend to donate. These donors place a high value on philanthropy, but simply haven’t worked out all of the details. Who should receive the gift? What is the best timing for the donation? How should the gift be structured?

For such donors, a donor advised fund (DAF) may be the best solution. While not a new charitable giving tool, donor advised funds have become one of the most popular giving techniques in recent years. Contributions as a percentage of total individual giving have more than doubled between 2010 and 2017, probably because these funds offer a variety of donor benefits, including control, anonymity, potential tax savings, and ease of giving.

Defining a Donor Advised Fund

A donor advised fund is a contractual relationship between the donor and a sponsoring organization. The donor makes a charitable contribution to the sponsoring organization, which then owns the assets and administers the fund. The donor retains advisory privileges over the charitable funds distributed from the account. This arrangement lets the donor qualify for an immediate income tax deduction for the amount of the contribution even though funds won’t be distributed until later, at which time the donor can influence distributions to support a chosen charity. A donor advised fund offers unique versatility in allowing a donor to give what is most favorable at the time that works best for the donor.

The Benefits of Donor Advised Funds

The innate flexibility of donor advised funds provides donors options that allow for some level of control, and arguably provides customized charitable giving options that let donors “donate their way.”

Advantages

For the donor, there are many benefits to donor advised funds:

1. Income tax deductions are allowed in the year of the contribution, even if no distribution is made from the DAF.
2. A DAF offers a more generous income tax deductibility percentage limitation than is available for private foundations, assuming the donor itemizes. The deduction limit for a cash gift is equal to 60% of a donor’s adjusted gross income (pursuant to the 2017 Tax Cuts and Jobs Act).
3. If privacy is a concern, a DAF may allow the donor to maintain anonymity (or at least minimize publicity).
4. A DAF’s advisory privilege offers donors a great deal of flexibility and control over fund distributions.

For certain donors, the flexible nature of a donor advised fund may be almost as important as the tax deduction. Consider a typical charitable donation—let’s say a donor writes a check to a charity, the charity accepts the donation, and the donor qualifies for an income tax deduction in the year of the gift. The gift is complete and the donor and charity each go their merry way. With a donor advised fund, however, the donor has more options. Let’s look at two examples:

Example: Brian took a gamble on an initial public offering of a new stock, and it paid off. He is going to owe significant income taxes this year and would like to use the stock to make a charitable donation so that he can make use of the charitable income tax deduction. However, he does not have a particular charity in mind yet. He has no time to research worthy charities and doesn’t want to rush into a decision. For Brian, a donor advised fund provides a way to make a donation, take the income tax deduction now, and then later recommend distributions to particular charities.

Example: Erin is a successful software engineer who will be receiving a series of substantial payments over the next 20 years as a result of her work being licensed. Erin wants to make a charitable contribution to her graduate school, but also wants the contribution to be large enough to allow the school to do something significant. Rather than contribute $10,000 or $20,000 per year, Erin instead contributes the annual cash into a donor advised fund. In 10 years, enough has accumulated that she can make a significant contribution.

Maintaining Control and Avoiding Problems

Donor advised funds offer a level of control that is often lacking with other charitable giving strategies. For donors who prefer flexibility in their giving but still want an immediate income tax deduction, a DAF may be the answer. As a professional advisor, understanding the basics of donor advised funds (including requirements, restrictions, benefits and shortcomings) will allow you to effectively counsel clients. Ideally, informed advice will lead clients away from inflexible gifts to transactions that are financially successful and personally satisfying to donors.