What is a Donor Advised Fund?
A Donor Advised Fund (or “DAF”) is the quickest, easiest, and most cost effective way for anyone to establish a charitable Family Foundation. Among other benefits, it enables families to focus on the fun and meaningful activities (charitable giving), and outsource the tedious issues (accounting, IRS compliance, tax reporting, vetting qualified charities, etc.) in a cost effective manner.
Why a DAF Instead of a Private Foundation?
There are a variety of non-profit structures that might be used for a “Family Foundation”. A Donor Advised Fund has a number of significant advantages over Private Foundations in particular, including:
- Quicker set up time. A DAF can be created in a matter of minutes. All other varieties of Family Foundations require establishing entities and getting those entities qualified with applicable tax authorities.
- Lower set up costs. In some instances, the set up cost can be zero.
- No Mandatory Distributions (the compulsory 5% annual grants do not apply to DAF’s, in part because collectively all DAF’s end up granting more than 5% each year so no one particular DAF is required to grant out 5%). This makes it possible to build up the fund over time for larger charitable functions in the future.
- No excise taxes on portfolio earnings. (Private Foundations, although “tax exempt” still pay taxes on certain earnings.)
- Better tax deductions. DAF’s qualify as a “public charity” and so a greater portion of the gift can be deducted each year, depending on the donor’s particular tax posture.
- Ease and lower cost of operation. The Donor does not have to bother with details which, as noted above, are outsources to the staff of the sponsoring organization. Sadly, this means that the lawyers and CPA’s are not able to charge ongoing annual fees. But in the end, this results in more going to charity and less going to administrative overhead.
- Economies of scale. Instead of each Family Foundation bearing the total cost of accounting, compliance, and so forth, these costs are shared among many similar accounts, so the overall burden and operating expense of each Fund is significantly less than if these costs were all born separately.
- Smaller Funds are Possible. With the reduced time and cost of setting up and operating a DAF vs. a private foundation, Donors are able to establish a Family Foundation with as little as a few hundred dollars. A DAF can even remain empty and unfunded until it is funded with a gift under a Will or Trust or a planned gift such as a Charitable Remainder Trust (CRT) or Charitable Gift Annuity (CGA).
Which Donor Advised Fund Should You Use?
There are many providers of Donor Advised Funds. There are essentially four types of DAF providers:
- Financial institutions such a banks, stock brokerages, and insurance companies,
- Regional charities focused on specific locations such as community foundations,
- Cause Specific organizations such as churches, schools, and hospitals, and
- Independent organizations that are not locked in to any particular financial platform, geography, or cause.
Each has their own pros and cons. I have used and continue to use each type, based on the particular needs and concerns of the client. Nevertheless, when there are no ties to a particular financial platform, geography or cause, in my practice and experience I prefer an DAF provider that is independent. Independence enables the DAF provider to invest on any platform, with any qualified financial advisor, anywhere in the world. Independence means that charitable grants are not locked into a particular location or cause, but can be made to any lawful charitable organization, anywhere in the world. It is for these reasons that absent a client specific reason to use one of the other options, I prefer to work with Legacy Global Foundation to establish Donor Advised Funds.
So What – Why Use a Donor Advised Fund?
Wealth is a catalyst. It triggers a reaction. Such reactions may be positive or negative. Wealth can both destroy individuals and families, and it can lift them up and empower them to accomplish great good in the world. Why does wealth bless some and ruin others?
Families that have a healthy relationship with wealth invariably apply a significant portion of their resources to making the world a better place. They leave everything better than they found it.
Establishing a Family Foundation as a Donor Advised Fund is a vital and important part of Dynasty Estate Planning. They are often one of the major agenda items in a Family Council.