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Know the Law: How Do Donor Advised Funds Work?

Written by: Caitlin G. McCurdy

Published in the Union Leader (4/21/2019)

Q: I normally donate $5,000 to charity every year, but this year my tax preparer suggested I create a donor-advised fund to maximize my tax deduction. What is a donor-advised fund and how does it work?

A: A donor advised fund (“DAF”) is an account that a person establishes with a public charity (also known as the sponsoring organization). The donor names the DAF and funds the account with an irrevocable gift. The gift is then administered by the charity. The donor receives immediate tax deduction for the full value of the gift and works with the DAF to advise on future grants to other exempt organizations you wish to benefit.

A DAF tends to be a simple, flexible and cost-effective method for charitable giving. You can continue to contribute to the DAF whenever you like. Typically you and perhaps your spouse would be the initial advisers (i.e., the ones recommending future grants from the DAF), but you can name your children or other individuals as successor advisers so that the fund continues in your names after your death.

A DAF can also be an effective way to leverage charitable giving. In the past, the standard deduction for a single filer was $6,350, so many taxpayers were likely able to itemize and deduct the charitable gifts. But with the standard deduction in 2018 having nearly doubled to $12,000 (along with caps on state and local taxes), taxpayers are more likely to take the standard deduction resulting in the loss of annual charitable deductions.

Alternatively, with a DAF, you can “front-load” your charitable gifts by making the equivalent of multiple annual gifts at one time. By front-loading a few or several years’ worth of charitable gifts this year, you could itemize and take the full charitable deduction on your 2019 Tax Return. You can then advise the DAF to direct smaller annual gifts to specific charities over the next several years.

Sponsoring organizations are oftentimes a local community foundation or the nonprofit arm of a financial/investment firm. When exploring which organization you would like to work with to establish a DAF, it is important to ask about the investment fees, the required minimum initial contribution and whether there are any requirements on the number or types of grants made each year.

If you think you would like to create a DAF or have any questions about the process, you should reach out to a trusted adviser who could assist you with selecting a philanthropic partner. You should also reach out to your estate-planning attorney to see if any updates should be made to your estate-planning documents (i.e., whether it makes sense to add charitable bequests to the DAF upon your death or whether the DAF could be a contingent beneficiary of your estate plan).

Caitlin McCurdy can be reached at [email protected].

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. We invite your questions of business law. Questions and ideas for future columns should be addressed to: McLane Middleton, 900 Elm St., Manchester, NH 03101 or emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.

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