A Donor Advised Fund (DAF) is a donation mechanism that gives you, as the donor, immediate tax benefits. It functions as a charitable investment account by allowing you to support the charities that you select through grant recommendations whenever you choose. In addition, a DAF provides you with the flexibility to donate to any number of IRS-qualified public charities over time. As a result, a DAF can be an efficient and cost-effective alternative to a family or private foundation.
Benefits of DAFs
A DAF has several benefits that make it an attractive option for donors. These benefits include:
- Administrative convenience, as all management and tax receipts are consolidated
- Donations of unusual or complex assets at fair market value, as well as nontraditional assets that charities may be unable to otherwise accept, such as cryptocurrency
- The ability to name the fund after yourself, your family, a friend, or an organization
- The ability to make anonymous donations
- No annual minimum distribution requirements
- Relative quickness and simplicity to establish
- No minimum contribution to establish with some organizations
- Families can collaborate to choose charities to receive funds
- Ability to set up automatic or recurring donations over time
Another significant benefit to the DAF is the tax benefits to the donor. DAF contributions allow you to receive the maximum tax deduction available in the same year you make the contribution. Despite your ability to take the tax deduction in the same year, you still can opt to distribute the donation funds on your schedule or over time.
If you and your beneficiaries make gifts to a DAF, you can avoid estate taxes that may decrease your estate assets in the future. In addition, if you donate complex assets, you also may avoid costly capital gains taxes while still getting the maximum value of the available tax deduction.
Finally, no required reporting is necessary for DAFs at this point. However, pending federal legislation could drastically change reporting requirements for DAFs. There has also been increasing movement in many states toward greater transparency for DAFs, including in California.
Supervision of DAFs
Typically, a non-profit organization acts as the custodian of the DAF. In most cases, this organization is a charitable organization founded by a financial services company, community foundation, or university. The custodian ensures that all non-profits that the donor chooses are IRS-qualified and oversees the donation process according to the donor’s wishes. The custodian also manages the investment of the DAF assets, with guidance from the donor., and maintains records for the DAF.
Restrictions on DAFs
Federal tax laws do place some restrictions on DAFs. These laws prevent DAF funds from being:
- Granted or used where there is a material benefit to the donor, the donor advisor, or a person related to the donor or donor advisor
- Donated to non-IRS-qualified groups, such as political campaigns, crowdfunding groups, and related organizations
- Received as grants, loans, compensation, expense reimbursements, or any payments to donors, donor advisors, or related parties
We Are Here to Help You with Your Legal Issues The attorneys and staff of Church Law Center focus on providing legal assistance to non-profits, churches, and religious organizations. As federal and state laws continue to evolve rapidly in these areas, we pride ourselves on keeping up to date with these changes as they occur. Our goal is to help you prevent legal issues before they occur. Contact our offices today at (949) 245-3177 or online and schedule an appointment to speak with us about your case.