How a Donor-Advised Fund Can Be Your Charitable Hub
By Jeffrey C. Zysik
In recent years, one charitable vehicle has zoomed to the fore-front of charitable planning – the donor-advised fund (DAF).
Financial advisors and estate attorneys rightly point their clients toward donor-advised funds as an effective charitable vehicle to incorporate in their planning. This is not only for income tax and estate planning purposes, but because of the flexibility DAF accounts provide to their clients’ overall philanthropic plan.
In addition to offering the most attractive tax deduction rules, DAF accounts provide flexibility other giving vehicles alone, such as charitable remainder trusts, charitable lead trusts, private foundations and supporting organizations, either cannot offer, or offer only with additional complexity, monetary costs, and/or time commitments.
DAF accounts are easy to set up and are great vehicles for managing and simplifying your annual giving. However, they function just as well, if not better, for those interested in making split-interest gifts where charity receives dollars at a future date. Here are some of the ways beyond annual giving that a DAF account can function as the hub of your philanthropy.
DAFs and Charitable Remainder Trusts
A charitable remainder trust (CRT) is most often used to diversify appreciated assets in an income-tax effective manner, allow for management of the assets in a tax-exempt vehicle, provide an income stream to you or another individual or individuals for a term of years or lifetime, generate a current income tax deduction, and provide for a future distribution to charity. A DAF account is an optimal beneficiary of a charitable remainder trust (CRT).
DAFs and Charitable Lead Trusts
A charitable lead trust (CLT) is the inverse of a CRT. A CLT pays an income stream to charity for a term of years and, once the term ends, any amount still in the trust is distributed to non-charitable beneficiaries. A CLT is a very effective estate planning vehicle that allows you to pass assets to the next generation free from estate and gift tax. However, similar to a CRT, you must “lock-in” the charitable beneficiaries at the time the CLT is established and funded. If you name a DAF account as the CLT charitable beneficiary, it is possible to vary the charitable organizations that ultimately receive benefits from the CLT.
DAFs and Your Estate Planning Documents
Estate planning documents, including those related to retirement accounts, life insurance, and trust documents, could have named a charity as a beneficiary of your estate. Consider how much easier it would be to manage the charitable aspects of your estate plan if you open a DAF account and your estate planning documents name only the DAF account as the charitable beneficiary. Now, whenever you want to change the ultimate charitable beneficiaries if your estate, you merely need to provide new advice to the DAF account sponsoring organization.
DAFs and Your Private Foundation
If you have a private foundation, a DAF can still play a central role in your year-end and all around charitable plan. Different limitations apply to the amount you can deduct in the current tax year depending upon whether you contributed to a public or a private charity. If you have maxed out current-year deductible contributions to your private foundation, by contributing to a DAF account you can increase your current-year deduction. Further, if your private foundation has become more of a burden than it is worth, consider terminating your private foundation by rolling all of the foundation’s assets to your DAF account.
A donor-advised fund account is a terrific and versatile charitable vehicle that can serve as the central hub of their charitable giving.
To learn more about the many ways a donor-advised fund can help you in your planned giving and secure your legacy for liberty, come to our session on Friday at 11:00am in the Bordeaux Room. Hear from our CFO and author of this article about the many different charitable planning vehicles out there and how to know which one is best for you.
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Jeff Zysik is COO and CFO at DonorsTrust. He is an attorney and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Before joining DonorsTrust, he was managing-director and co-founder of Charitable Entity Administration, LLC (CEA).