Donor Advised Funds

Donor-Advised Funds (DAFs): A Strategic Way to Give

At Bridge Law, LLP, we believe in empowering our clients with charitable giving tools that allow them to make a lasting impact through their charitable giving. One of the most versatile and efficient ways to manage charitable contributions is through a Donor-Advised Fund (DAF). In this article, we’ll explore what DAFs are, how they work, and the benefits they offer both philanthropically and financially.

What is a Donor-Advised Fund (DAF)?

A Donor-Advised Fund is a charitable giving vehicle that allows individuals, families, or organizations to make charitable contributions, receive immediate tax benefits, and recommend grants from the fund over time. It operates similarly to a charitable investment account where donors contribute cash, securities, or other assets, and these contributions are invested for tax-free growth. Over time, donors can recommend grants to support their favorite charities or causes.

How Do DAFs Work?

The process of setting up and managing a DAF is straightforward:

1. Establish a Fund: You open a DAF with a sponsoring organization, typically a public charity or a financial institution that offers DAF services.
2. Make Contributions: You can donate various types of assets, including cash, stocks, real estate, or other appreciated assets. Once donated, these assets are eligible for an immediate tax deduction based on your adjusted annual gross income (Adjusted AGI), based on the the type of property contributed.
3. Invest and Grow: The funds are invested in a manner that aligns with your risk tolerance and growth objectives. The assets grow tax-free, increasing the amount you can eventually grant to charities.
4. Recommend Grants: At any time, you can recommend grants from your DAF to support qualified 501(c)(3) organizations such as a public charity. You have the flexibility to spread these grants over several years or make them all at once.

Why Choose a DAF?

DAFs offer several key benefits, making them an attractive option for individuals and families looking to make a meaningful impact:

1. Tax Efficiency: DAFs provide an immediate tax deduction when you make a contribution, regardless of when you choose to distribute the funds to a charity. If you donate appreciated assets, you can avoid capital gains taxes, further maximizing the amount you give.
2. Charitable Gift Bunching: Using another strategy called Gift Bunching, a DAF can be a great way to take a larger income tax deduction upfront but still take your time in making donations over a longer period of time, over your lifetime.
3. Flexible Timing: With a DAF, you can contribute in a high-income year when you need the tax deduction, but take your time deciding which charities or causes you wish to support. This is particularly useful for individuals who want to engage in long-term charitable planning.
4. Ease of Management: Unlike setting up a private foundation, which requires legal formation, ongoing compliance, and administrative responsibilities, a DAF is simple to establish and manage. The sponsoring organization takes care of all the legal and administrative work, allowing you to focus on your philanthropic goals. 
5. Privacy and Anonymity: DAFs provide the option for anonymous giving, which can be particularly appealing for donors who prefer to keep their charitable activities private.

DAFs vs. Private Foundations

For a more detailed article on private foundations, and the differences between an operating and non-operating foundation, click here.

Many clients ask us about the difference between a DAF and a private foundation. While both options offer structured ways to give, there are some key distinctions:

• Cost and Complexity: DAFs are generally less costly and less complex to establish and maintain compared to private foundations. There are no ongoing compliance burdens, and the sponsoring organization manages all administrative tasks.
• Tax Deduction Limits: Contributions to a DAF typically provide a higher tax deduction limit compared to private foundations. For example, cash donations to a DAF may be deductible up to 60% of your adjusted gross income, while donations to a private foundation generally are limited to 30%, though there are exceptions.
• Flexibility: While private foundations offer more control over how funds are invested and distributed, they come with additional regulations and requirements. DAFs, on the other hand, offer greater flexibility with minimal administrative burdens.

Who Should Consider a DAF?

DAFs are an ideal choice for those who want a streamlined and flexible way to give back without the complexity and administrative burden of managing a private foundation. If you are looking for a tax-efficient solution that allows you to build a legacy of giving over time, a DAF may be the perfect fit.

At Bridge Law, LLP, we work with clients to design personalized charitable giving strategies, including setting up and managing DAFs. Our goal is to ensure that your philanthropic goals align with your overall estate and financial plans. You don’t need to be among the ultra-wealthy to make a difference; DAFs are accessible to many individuals and families who want to maximize the impact of their charitable dollars.

If you’re interested in learning more about how a Donor-Advised Fund can be a powerful tool in your charitable planning, contact us today to schedule a consultation.

Ready to Start Your Giving Journey?

We offer a one-hour $500 charitable gift journey consultation, where we review for you all of your potential gifting strategies. Learn more about how Bridge Law, LLP can help you leave a lasting impact.