(Important Note: AMA Members! Always Contact your Tax Advisor)!
Introduction
Definition of a Donor-Advised Fund (DAF):
- A Donor-Advised Fund is a philanthropic vehicle that allows donors to make charitable contributions, receive an immediate tax deduction, and then recommend grants from the fund over time. DAFs are established and managed by sponsoring organizations.
Purpose and Benefits:
- Facilitates strategic and flexible charitable giving
- Provides donors with tax advantages
- Simplifies the process of managing charitable donations
How a DAF Works
Establishing a DAF:
- Donors can set up a DAF by making an irrevocable contribution of cash, securities, or other assets to a sponsoring organization. The donor then retains advisory privileges over how the funds are distributed.
Contributions and Tax Deductions:
- Contributions to a DAF are tax-deductible in the year they are made. Donors can contribute a variety of assets, including cash, stocks, and real estate.
Investment and Growth:
- DAFs typically allow donors to recommend how the contributed funds are invested, potentially growing the assets over time.
Grantmaking Process:
- Donors can recommend grants to eligible charitable organizations. The sponsoring organization ensures that the recommended grants comply with legal requirements.
Key Players in a DAF
Donor:
- The individual or entity establishing the DAF, making contributions, and recommending grants.
Sponsor Organizations:
- Entities that manage and administer DAFs. These organizations are often public charities or financial institutions. The AMA Foundation is the Sponsor Organization.
Investment Advisors:
- Professionals or organizations responsible for managing the investment of DAF assets based on the donor's preferences.
Grantee Organizations:
- Charitable organizations that receive grants from the DAF. They must be recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.
Features and Characteristics
Flexibility in Giving:
- Donors have the flexibility to recommend grants to a wide range of charitable organizations, including nonprofits, educational institutions, and religious entities.
Anonymity:
- Donors can choose to remain anonymous when making grants, providing privacy if desired.
Investment Options:
- Many DAFs offer a range of investment options, allowing donors to potentially increase the funds available for grantmaking.
Minimum Contributions and Fees:
- Some DAFs have minimum contribution requirements, and fees may apply for administration and investment management.
Tax Implications
Immediate Tax Deductions:
- Donors receive an immediate tax deduction for their contributions to a DAF, even if the funds are not immediately distributed to charitable organizations.
Capital Gains Benefits:
- Contributions of appreciated assets to a DAF can potentially allow donors to avoid capital gains taxes.
Estate Planning:
- DAFs can be part of an effective estate planning strategy, allowing donors to involve future generations in philanthropy.
Best Practices for DAF Management
Setting Charitable Goals:
- Define clear philanthropic objectives and priorities to guide grantmaking decisions.
Researching Sponsor Organizations:
- Select a sponsoring organization that aligns with the donor's values and offers the desired features and services.
Grantmaking Strategies:
- Develop a thoughtful and strategic approach to grantmaking, considering short-term and long-term impact.
Common Misconceptions
Irrevocability of Contributions:
- While contributions to a DAF are irrevocable, donors retain advisory privileges over the grantmaking process.
Control Over Investments:
- Donors often have the ability to recommend the investment strategy for DAF assets.
Perceived Complexity:
- Contrary to common misconceptions, DAFs can be relatively simple to establish and manage.
Conclusion
Recap of DAF Benefits:
- Tax advantages
- Flexibility in grantmaking
- Strategic and thoughtful philanthropy
Encouragement for Strategic Charitable Giving:
- Consider the long-term impact of charitable contributions and leverage the benefits of a DAF for meaningful giving.
Please note: this information is generally accurate; the specifics can vary depending on the laws and regulations of the jurisdiction in which the DAF is established. Therefore, it’s always a good idea to consult with a financial advisor or legal professional when considering a DAF.
