Charitably Inclined? Consider Pairing a Donor-Advised Fund with Your Estate Plan

If you are prioritizing charitable giving in your estate plan, you may want to consider using something called a donor-advised fund (DAF) which has become more popular in recent years.

The value of DAF grants made to qualified charitable organizations increased 9% to $52.16 billion in 2022, and the number of accounts increased 2.9% to nearly 2 million according to the 2023 Donor-Advised Fund Report. Here are some of the basics to know about DAFs:

ABCs of DAFs

Typically, a DAF requires an initial contribution of at least $5,000 and is managed by a financial institution or an independent sponsoring organization that charges an administrative fee based on a percentage of the deposit.

You instruct the DAF how to distribute contributions to your charities of choice. Your contributions are invested and may potentially grow within the account while the charities to support are decided on. The charitable organizations you select are then vetted to make sure they are qualified to accept DAF funds. Finally, the checks are cut and distributed to these charities.

Contributions to a DAF are usually made in cash or cash-equivalents, but you may be able to contribute property, such as securities or even real estate, depending on the fund.

DAF benefits

Using a DAF is somewhat easy since the administrative work and logistics are handled for you. You can simply make contributions to the fund, and it may be possible to transfer securities directly from your bank account.

The contributions you make to the DAF are also generally tax deductible, so these gifts can offset your income tax liability if you itemize deductions on your tax return. Instead of having to wait until the fund distributes them, contributions can also be deducted in the tax year in which you make them.

You can write off the full amount of monetary contributions, up to 60% of your adjusted gross income (AGI) in 2024, and any excess is carried over for five years. In the case of a gift of appreciated property, the donation is equal to the property’s fair market value if you have owned this asset for longer than one year, up to 30% of AGI. Any excess is also carried over for five years. The deduction for property is otherwise limited to your adjusted basis, which is often your initial cost.

Distributions can be made to charities anonymously if you wish, or you can name the fund after your family. DAFs may also be created through your will and can be used to provide a lasting legacy.

DAF drawbacks

It is worth noting that, in spite of this misconception, DAFs do not give you control over how the charities use the money that is distributed to them.

You also cannot personally benefit from your DAF, so you could not use it to buy tickets to a local fundraiser.

Finally, the administrative fees may be considered a drawback as well.

The choice is yours

It is worth considering if a DAF is the right choice for your estate plan, especially if you are focused on supporting charities that are important to you.

For help with charitable giving or any aspect of your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.