I’ve always felt that donor-advised funds (DAFs) were a smart way for families to manage their charitable donations. After the recent death of my father, I’ve gained firsthand perspective on just how valuable they are.
DAFs are charitable giving accounts offered by a sponsoring organization. Donors contribute cash, appreciated securities or even tangible assets such as real estate or jewelry to the account in one or more installments. They receive an immediate, maximum tax benefit and then recommend grants from the fund over time. Once donated, the funds do not come back to you.
In the wake of my dad’s death, establishing a DAF allowed our family to help shape his legacy in a thoughtful, unhurried way. Now, with the fund established, we are free to make pressure-free decisions about where the money will go and when.
When it comes to charitable giving, very often the tail wags the dog. Family members might receive the proceeds from the sale of a business, a substantial bonus, a legal settlement or an inheritance, and then have to scramble to make donations by the end of the calendar year to avoid a huge tax bill.
Donor-advised funds put you back in control. They let you give when it’s convenient and when it meets your goals. And because DAFs let you invest and grow assets tax-free, they can help provide more money for your charities over time.
While other vehicles for charitable giving are available, I believe that DAFs compare favorably for many wealthy families. Flexibility is an important consideration—a private foundation must give away at least 5% of its assets each year; a donor-advised fund does not. Donor-advised funds are also quite cost-effective, compared with private foundations that involve administrative costs of up to 8% annually.
Among DAFs’ benefits is the fact that they can help simplify your financial life. Through a platform like Schwab Charitable, you can research charities, recommend grants, track giving over time and consolidate your tax reporting, all online. The funds also relieve you of administrative duties and responsibility for investing the assets within the account.
For families who value confidentiality, donor-advised funds can provide a screen of privacy. Today, countless organizations—from international humanitarian groups to your kids’ school—can pull up your charitable giving records with a few keystrokes. By removing the target from your back, DAFs can put you back in control of the charity selection process.
Finally, donor-advised funds allow families to create a lasting charitable legacy, which I believe can help to knit them closer together. I look forward to sitting down with my brothers once each year to decide which grants to recommend in our dad’s memory. If you’d like to discuss setting up a donor-advised fund, please give us a call.