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Your Charitable Donations: Giving with a Donor-Advised Fund

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Earn tax deductions and other benefits by donating to a donor-advised fund

Brought to you by: Beacon
Share current LOB: WealthManagement

If you want to give substantially to charity but lack the time and/or energy to run your own foundation, a donor-advised fund (DAF) may be just the answer.

A DAF is an investment account set up through a financial institution or charity. You contribute cash and/or appreciated securities and get an immediate tax deduction. Then you advise the fund to invest the money in a portfolio of mutual funds from among the DAF provider’s offerings. You recommend which charities receive your contributions, in accordance with guidelines furnished by the DAF provider and the IRS.

DAFs are growing in popularity. In fact total contributions to DAFs exceeded $9.6 billion, up 10 percent, in 2012, according to the National Philanthropic Trust (NPT), which provides DAF services to individuals and private foundations.1

DAFs’ advantages include:

Convenience. Setting up and managing a foundation requires considerable time and money. But with a DAF you don’t have to handle logistics or record-keeping. "The donor gets the chance to advise on grants and investment options, but all the administration and grant management is up to the charity," says Eileen R. Heisman, president and CEO of NPT.

Tax planning. Establishing a DAF can offer significant tax benefits. For instance if you inherit a windfall or receive a large bonus, you could offset some of the extra income tax you’d owe in that year by making a large gift to a DAF.

Meanwhile contributing appreciated assets offers several advantages. You can deduct the assets’ market value while clearing the capital gains from your portfolio. Also you can take the tax deduction in the year it's most beneficial to you but spread the grants over the years ahead. This strategy allows the assets to appreciate further and gives you time to decide how best to disperse them.

Estate and legacy strategies. Many people use DAFs to pass along assets to charity and remove them from their taxable estates while creating lasting legacies. "A donor-advised fund can be used as an endowment or passed along to the next generation," Heisman says. "You can leave a gift in your will to create a donor-advised fund for your heirs. That allows them to become grant-makers themselves."

Additional DAF considerations

Contributions to DAFs are irrevocable. So before you establish a DAF or contribute to one, make sure you won’t need the money for future expenses such as medical costs, or a child or a grandchild's college tuition.

Also pay attention to fees, as different DAFs have different fee structures. Charitable administration fees are standard—look for fees below 1 percent to ensure your money makes an impact. In some cases, though, you also need to pay an advisor fee to set up the fund.

The Board of Directors of the fund has ultimate control over all assets. Donors have no right to income or principal and account values will fluctuate. The amount ultimately available for Donor recommended grants may be more or less than Donor contributions. Potential donors should consult their tax advisors.

1 "2012 Donor-Advised Fund Report," National Philanthropic Trust.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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