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Donor-advised funds: making year-end giving strategic, easy, tax smart for clients.

As year-end holidays and tax deadlines apporach charitable giving can be unplanned, difficult to organize and rushed. But with proper planning, iCs possible to help your clients realize charitable giving goals while reaping significant tax benefits.

A donor-advised fund DAF is quickly becoming a popular philanthropic solution for clients, and the growing use of DAFs isn't surprising. Accounts can start as low as $5,000 or as high as $1 billion and deliver outstanding tax benefits for a wide range of gifts from cash and appreciated securities to closely held shares and property

One of the most notable features of DAFs is how they meouple the timing f the charitable tax deduction from the granting, which enables donors to easily make one tax-deducible contribution at year-end and grant to charities of their choice on their own schedule, DAFs also allow donors to maintain a level of privacy around their giving if they desire.

An Easy, Low-cost Solution

Simply put, a DAF is a charitable account opened in the name of one or more individual donors and custodied by a non-porfit typically a charitable organization founded by a financial services company, a community foundation or a university. The donor decides when and how much to contribute to the account and can direct grants to 501 [c] (3) charities that are in good standing with the IRS. The custodian vets charities for IRS eligibility and sends out grants at the donor's request

The custodian also manages the investment of the charitable assets based on guidance from the donors. Some custodians offer a choice of investment pools and allow independent investment advisers to manage the assets of larger accounts. The custodian is responsible for the recordkeeping, which is usually consolidated online, allowing donors to casily access a list of all of their contributions and grants for tax purposes, thereby enabling a strategic approach to philanthropy.

DAFs are a much simpler alternative to private foundations, which often require more administrative duties. Private Foundations must create and manage a board of trustees. hire administrators. file increasingly accessible public documents. ensure annual disbursements meet the IRS requirement of. 5 percent of foundation assets and pay excise taxes on investment income.


Upon opening a DAF autumn. incremental gifts start at S100 and there are no annual disbursement requirements or public filings. Grants start as low as S50 mid can be acknowledged or anonymous a feature valued by those who want to avoid publicity or further solicitation. Administrative fees are typically less than I percent of assets under management less than 0.6 percent at the largest custodians: and lower for the largest accounts.

Unique Tax Advantages

DAF contributions carry significant tax benefits and are eligible For au immediate tax deduction. Gash contributions to DAF's are deducted up to 50 percent of adjusted gross income. higher than the 30 percent maximum For contributions to private Foundations. Gifts of appreciated assets, such as stocks, are deductible up to 30 percent for a DAY. but only 20 percent For a private Foundation. Both enjoy a five-year, carry-forward provision for excess deductions.

Contributions of appreciated securities with unrealized long-term capital gains including IPO shares alter restrictions are liked tarn. an additional tax benefit. as they Citable donors lo avoid capital gains taxes associated with the sale of these types or securities, This is an increasingly attractive benefit, as many donors have a portion or their portifolio in appreciated assets and they may want to consider donating them before donating cash.

Investors holding low-cost-basis stock with a capital gain of S100.000 would lace a S14,250 tax bill if they sold their shares. By donating the stock to their DAF, they can avoid this capital .gains tax on the sale. have the lull S100,000 value go to charity and realize a 328,000 charitable income tax deduction.

Extracting Value From Illiquid Assets

The advantages of contributing appreciated assets to a DAF are not limited to publicly traded securities. Increasingly, DAFs accept less liquid assets, including restricted and unrestricted stock: privately held securities such as private equity. certain corporate stocks and pre-IPO shares: tangible personal property; and the cash value of life insurance policies and real estate.

Donations of less liquid assets are more complex. The DAF custodian will need to outline how the shares will be turned into cash, which call then be disbursed to charities The IRS also requires independent appraisals to be conducted for all non-cash gifts worth more than $5,000, so gills of these types of assets often need to be larger than cash minimums to justify the time and expense. Still, the largest DM' custodians have become known for their ability to accept illiquid assets and provide charitable value to their donors.

Building a Charitable Legacy

DAFs are designed to make it easy for donors to bequeath their account. and enable others to support charitable causes after their passing. Many donors take comfort in knowing that the contributions they make to their DAF may allow a surviving spouse, child, close friend, trustee or other family member to make grant requests to charities they value. In doing so, they pass their commitment to philanthropy on to the next generation. Some DAF custodians also allow donors to recommend a recurring gift to their favorite charities after their passing.

DAFs are also increasingly used as a part of a well executed estate plan, since assets donated to a charitable account are not part of a taxable estate. There are several tax smart ways to add to DAFs at death, including designating a DAF as a beneficiary of a retirement plan, revocable or living trust, charitable trust or life insurance plan.
Private Foundations and Donor-Advised Funds

Feature Private Foundation Donor-Advised Fund

Asset minimums Generally recommended $5,000
 only (or those with
 millions of dollars
 in charitable assets

Startup costs May be None
 documentation, tax
 filings, other

Ongoing annual May be substantial Comparatively low

Privacy Public disclosure of Transactions can be
 contributions and private
 grants in annual tax

Tax deduction limits 30% of adjusted gross 50% of AGI
for cash income (AGI)

Tax deduction limits 20% of AGI 30% of AGI
for securities

Administration Required Managed by DAF
 recordkeeping, asset custodian

Reporting Required annual state None
 and federal tax

Taxes Excise taxes, up to None
 2% of annual
 investment income

Annual distribution 5% distribution None
requirements required annually

Professional asset Yes Yes
management options

Rande Spiegelman, CPA, CFP is vice president of financial planning for the Schwab Center for Financial Research. You can reach him at The tax information herein is not intended as specific individualized advice. Where such advice is necessary and appropriate, clients should consult their tax and legal advisers.
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Title Annotation:charitablegiving
Author:Spiegelman, Rande
Publication:California CPA
Date:Sep 1, 2012
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