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Legacy Planning with Donor Advised Funds

Posted by Leslie L. Horgan | Client Service Specialist
May 16, 2018

Legacy Planning with Donor Advised FundsIf part of your legacy and estate planning involves giving to charity, you may want to consider Donor Advised Funds (DAF). DAFs are not generally telegraphed as a solution for investors with charitable inclinations, but perhaps they should be – DAFs offer a unique approach to giving assets, potentially growing your assets, and then donating them to the charity (or charities) of your choosing – all in a tax efficient manner.

So What Are Donor Advised Funds Exactly?

The IRS defines them as a fund or account operated by a charitable, 501(c)(3) organization, which is known as a “sponsoring organization.” Once a Donor Advised Fund is established at a sponsoring organization, contributions are made to the account by individual donors. These contributions can range from anything to cash, or mutual funds, or commercial or residential real estate, to life insurance policies and more. Once the donor makes the contribution, the sponsoring organization has legal control over it, but the donor is generally entitled to an immediate tax deduction associated with the charitable contributions and would also maintain control over the investment management and distribution of funds from the account.

How A Donor Advised Fund Works

Breaking the process down in a step-by-step format may help make the Donor Advised Fund concept clearer. Here’s how it could work:

Step 1: You make an irrevocable contribution to a Donor Advised Fund from your personal assets. This could mean donating cash, shares of stock or mutual funds, closely held S-Corp or C-Corp shares, residential and commercial real estate, agricultural commodities, life insurance policies, or even precious metals.

Step 2: In some cases, you can immediately receive the maximum tax deduction allowed by the IRS.

Step 3: You then name your DAF account, add the wealth advisors you want to work with, name successors if applicable, and you can even designate the charitable beneficiaries of your choosing – though that is not necessarily required right away.

Step 4: Your advisor manages your DAF, presumably with a goal of achieving growth of the assets.

Step 5: Sometime down the road, on your own timetable, you can recommend grants/distributions to qualified charities and nonprofit organizations. Once a distribution is established, the charity of your choosing receives a check from the DAF with an indication that it came from you (if that’s what you desire). You can also privately donate to the charity of your choosing. 

Things To Be Aware Of

Donor Advised Funds have come somewhat under the microscope of the IRS, but not because of a fundamental issue with flaw with the vehicle itself. The IRS attention has come because of a “number of organizations that appear to have abused the basic concepts underlying donor advised funds.” In other words, some organizations or funds posing as charitable were really just after the preferential tax treatment. A classic case of a few bad apples trying to spoil the bunch.

In the event that the IRS detects or uncovers misuse of DFAs, it could lead to disallowing deductions for charitable contributions, imposing excise taxes on sponsoring organizations and/or donors, and/or denying or revoking a charity's 501(c)(3) exemption. All outcomes that can seemingly be avoided by following the rules, working with a trusted advisor, and doing the right thing.

Is A Donor Advised Fund Right for You?

If your long-term plans are to give a sizable amount of assets to charity anyway, it may be worthwhile to at least explore the pros and cons of Donor Advised Funds. If you have questions or want to hash out some of the details of DAFs for your charitable giving goals, just give us a call at 1-800-541-7774 or send a note to wealth@wrapmanager.com today to get started. 


The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice, either expressed or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.

This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. The information and opinions contained in this material are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.

legacy planning donor designated trusts donor advised funds