Estate planning is how we make important decisions about what happens to our assets during life and after we pass away. For those who are charitably inclined, using Donor-Advised Funds (DAF) to support multiple charities in your Estate Plan can be a strategic and impactful way to support your favorite causes. In this article, we’ll explore what a Donor-Advised Fund is, the benefits and drawbacks of using one, and how it can fit into your overall estate plan.
Disclaimer: The information provided is intended for informational purposes only and should not be construed as legal advice.
What is a Donor-Advised Fund?
A donor-advised fund is a philanthropic vehicle designed to enable donors to support one or more charities over an extended period. It offers the unique advantage of allowing you the opportunity to make an immediate tax-deductible charitable contribution but still have control over which charity gets the funds and when. In essence, it’s a powerful tool that allows you to amplify your charitable contributions and support multiple charities over the years, all without the need to establish a private foundation.
How Does a Donor-Advised Fund Work?
When you decide to initiate a DAF, the first step is to identify an organization to sponsor the fund and assist you in opening the account. This can be a community foundation or the charitable branch of a financial services company. Once the account is set up, you can contribute various assets to the fund, including cash, stocks, and even real estate. These assets can then be invested, potentially growing tax-free. As time passes, you gain the ability to recommend grants to your preferred charities from the fund, with the sponsoring organization handling the distribution of funds.
Pros of Using a Donor-Advised Fund
Immediate Tax Benefits: All contributions to a DAF give you an immediate tax deduction, which can be particularly beneficial in years when you generate higher taxable income.
Flexibility in Giving: You don’t need to specify which charities are supported beforehand. Over time, you can decide which organizations to include or exclude, allowing you to support a variety of causes without the administrative burden of managing individual donations or a private foundation.
x-Free Growth: The funds can be invested and grow tax-free, potentially increasing the amount available for charitable giving.
Legacy Planning: You can name successors to continue recommending grants from the fund after your passing, creating a lasting charitable legacy. This approach is particularly advantageous if a charity you support ceases to exist; your successor can identify a similar organization to carry on your philanthropic goals.
Cons of Using a Donor-Advised Fund
Irrevocable Contributions: Once you contribute assets to a DAF, the contribution is irrevocable, meaning you cannot take the assets back.
Control Limitations: While you can recommend grants, the sponsoring organization has the final say in approving them. This is typically a formality, but it’s worth noting.
Fees: DAFs may come with administrative and management fees, which can vary depending on the sponsoring organization.
Grant Restrictions: Certain limitations apply to the types of organizations and purposes that can receive grants from a DAF. For example, grants cannot be used to satisfy personal pledges or to support political campaigns.
Incorporating a Donor Advised Fund into Your Estate Plan
If you are looking into establishing a DAF, you must also ensure that your DAF is integrated with your other estate planning documents, such as your will, trusts, and beneficiary designations to reflect your overall charitable intentions. Once you determine the causes and organizations you want to support and how much of your estate you wish to allocate to charitable giving, you should then meet with an estate planning attorney to ensure this gift will not jeopardize other areas of your plan. Once the DAF is opened, you can name the DAF as a beneficiary in your will, trust, or retirement accounts. You also need to consider who will have the authority to recommend grants from the DAF after your passing. This can be a family member, a friend, a trusted advisor, or a charitable organization.
Why Meet with an Estate Planning Attorney?
Incorporating a DAF into your estate plan can be a powerful way to achieve your philanthropic goals while maximizing tax benefits, so long as it coordinates with your overall estate strategy. LSS Law can help you navigate the complexities of setting up a DAF, ensuring it aligns with your broader financial and estate planning objectives. If you are looking for personalized advice tailored to your unique situation, ensuring that your charitable legacy is preserved and your estate is managed efficiently, contact us to schedule a consultation and take the first step toward incorporating a Donor Advised Fund into your estate plan. Together, we can create a plan that reflects your values and secures your legacy for future generations.
