DONOR ADVISED FUNDS – a Substitute for a Private Family Foundation
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How a Donor Advised
Fund (DAF) Works |
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What is a donor-advised fund? It is like a
private family foundation without the administrative requirements of a
private family foundation. Here's how it works: A donor or donors (such as husband and
wife) set up a donor advised fund (DAF) with an “umbrella
organization” which acts as the administrative agent for the DAF. The umbrella organization is itself a
public charity whose purpose is to administer DAFs for charitable giving. What is contributed? Donors make a contribution of appreciated securities or cash to the
umbrella organization in the name of the DAF. The DAF will have the donors’
names on the account, such as the “Smith Family Fund.” Donors may
make contributions in any amount and as often or seldom as they wish. For small amounts of money to be
contributed by a family, a DAF is a much efficient way to proceed than a
private family foundation. DAFs
can be funded with very small amounts of money, even as small as several
thousand dollars. Is there an income tax advantage to a DAF? Yes. When the contribution is made, the
donors receive a charitable income tax deduction similar to that received
when a gift is made to any public charity. If a DAF is funded at death (a
“testamentary gift to a DAF) there is no income tax deduction; while
this sounds unattractive, remember that a testamentary transfer to a DAF
means you retain the full use of the funds during your lifetime for your
benefit. A testamentary transfer
of assets to a DAF is often done for the purpose of avoiding estate taxes on
the estate. Money contributed to
a charity is 100% deductible for estate tax purposes. Does the PFF pay income taxes? No. the PFF does not pay
income taxes, as it is tax-exempt, as are all charities. This means the PFF could sell the
donated appreciated securities without paying a capital gains tax. How are the funds managed? Funds in the DAF are
managed by professional investment advisors, a person who is often the
donor’s established investment advisor. The DAF does not pay income
taxes on its growth or income, but it does have reporting requirements to the
IRS and the State. The umbrella
organization handles all administrative requirements. How long can a DAF last? It can last as long as you
wish. A DAF could be funded in
2006 and then all funds in the DAF given away in the same year. Or a DAF could be funded and very
little distributions from the DAF made in any one year. Unlike a private
family foundation, there is no 5% distribution requirement. A DAF can be multi-generational,
meaning that the donors’ children can continue as advisors to the fund
after the parents’ death. What are the administrative requirements of a DAF? The administrative requirements are
always handled by the umbrella organization, which charges the DAF a fee each
year to cover the costs of administrative. These fees vary with the umbrella
organization and are usually on a sliding scale. The larger the DAF, the
smaller the percentage fee. The
DAF pays annual administrative fees to the umbrella organization for accounting
services and tax return services. Any IRS-qualified public charity is eligible to be
a recipient of distributions from the DAF – those you've supported for
years, or new ones you discover. Which charities
can the family make distributions to from the DAF? Any public charity will qualify as
legal recipient. In this sense, a DAF is like a conduit. The DAF is funded by you and you get
an immediate charitable income tax deduction. When you are ready to do so, you
direct a payment from the DAF to a qualifying public charity (there is no
second income tax deduction). What are some
examples of “umbrella organizations?” Foundations or charities that call
themselves “community foundations” are umbrella organizations.
These include the Triangle Community Foundation and the Winston-Salem
Foundation. ================================== Nathaniel E. Clement, J.D., 2006 |