The popularity of donor-advisory funds (DAFs) has increased dramatically in recent times and so they at the moment are some of the common ways to make charitable donations.
DAFs offer significant advantages, but many persons are unaware of some potential pitfalls and risk disappointment.
A DAF is a nonprofit entity established by a sponsoring organization. The largest DAFs are established by private financial services corporations akin to Charles Schwab & Co., Fidelity and Vanguard. Although established by the businesses, DAFs are independent 501(c)(3) public charities and have their very own legal personality. Other DAFs are established by local or regional charities, often called community foundations.
An individual opens an account with a DAF and deposits money or property. Most DAFs now accept many forms of property, including digital currencies, shares in private corporations, real estate, and collectibles.
The individual is entitled to a deduction for charitable contributions starting on the date money or property is transferred to the DAF. However, the DAF doesn’t must make donations to individual charities immediately. These donations could be remodeled time.
The DAF invests the cash or assets it owns, and the returns from the investment increase the worth of the donor’s account, giving the donor more cash over time.
Many DAFs, particularly those sponsored by national financial services firms, allow the donor to decide on learn how to invest the account from options offered by the sponsor. Others offer limited options or invest all contributions together.
In addition, the donor makes recommendations for deposits from the account and might transfer the cash to the charities she or he prefers and based on his or her preferred schedule.
DAFs have significant benefits, but additionally some potential disadvantages that should not sufficiently addressed.
Some DAFs have an annual limit on the dollar amount or percentage of the account that could be donated to a charity. Some have each limits.
A DAF may limit the variety of charities an individual can donate to annually. Other DAFs allow donations to a vast variety of 501(c)(3) charities.
Determine whether a DAF has such limits and enforces them.
Another drawback is that donations to a DAF are irrevocable and turn into the property of the DAF. This can have two essential consequences.
Once property is donated, the DAF decides what to do with it. There have been some court cases where donors have transferred property to a DAF and given instructions or preferences about how and when the property must be sold. The timing or manner of sale would affect the worth of the stock or the donor’s tax deduction.
But the DAFs sold the property when it was convenient for them. The courts ruled that even when the DAF had promised to not sell the property without the donor’s consent, once the donation was complete, it could do whatever it wanted with the property. The donor had no rights to the property.
Likewise, the donor only recommends to the DAF which charitable donations he should make. The final decision rests with the DAF.
I’m not aware of any case during which a DAF has rejected a donor’s advice, except when the really helpful recipient was not a 501(c)(3) nonprofit organization. However, the DAF has the best to reject a donor’s advice since it controls the assets.
An even bigger query is what happens to the account if the donor dies or becomes incapacitated.
This issue is becoming increasingly essential as people use DAFs as an alternative choice to private foundations or trusts and contribute to DAFs because they expect the donations to be spread over a couple of generation. Some estate or financial planners now advise people to incorporate larger donations of their wills fairly than sending them to individual charities or a personal foundation.
A recent study by attorneys Cassandra S. Nelson and Barry A. Nelson sheds clear light on this query. Steve Leimberg’s Charity Planning NewsletterThe study revealed several key differences and gaps in DAF’s succession policy.
Generally, DAFs set the rules for the extent to which successors can manage the account and recommend contributions if the donor dies or loses cognitive ability. Some don’t allow successors, while others do, but with restrictions.
Some DAFs comply with modify their standard donor agreements to permit a donor to find out how subsequent generations recommend donations after the unique donor dies or becomes incapacitated. However, a few of these DAFs allow successor decision makers for under one generation, while others allow a minimum of two generations of successors.
Among the DAFs that allow children or other successors to make recommendations, some may modify the agreement in order that, where there are multiple children, recommendations can only be made with a majority or unanimous consent of the youngsters, whichever the donor prefers. However, others will follow the recommendations of all the youngsters named by the donor without searching for the consent of, and even notifying, the opposite children.
When a successor is approved, some DAFs will review the successor’s applications for consistency with the grants and donations of the unique donor or with the rules established by the unique donor. However, other DAFs will follow any recommendations made by a successor.
Another problem is what happens if the testator has not designated a successor or if the designated successors have died or lost their cognitive abilities.
Most DAFs say that at that time, the account is closed and distributed to charities. Some of those DAFs distribute the cash to charities previously really helpful by the donor or successors. Other DAFs say they should not obligated to offer preference to those charities.
Given these findings, it will be significant for donors to think about estate planning for DAFs. They have to know what is going to occur to the account in the event that they die or turn into incapacitated.
Determine whether a DAF allows changes to its standard agreement that reflect your interests and desires for the account. Also, check to see if there are any restrictions on the flexibility to transfer the account to a different DAF if the present DAF changes its policies or is just not managed as expected. The study authors said community foundation DAFs are inclined to be more flexible on these issues than other DAFs.
An alternative strategy is to first create a trust. You transfer money to the trust now or through your will, and the trust makes the DAF contributions. Then the trustee has the authority to direct the charitable contributions. The future contributions are controlled by the trustee succession process and the trust agreement’s rules for determining donations. The DAF’s policies don’t matter much since the trust will proceed so long as there may be money within the DAF account.
While the trust approach would solve succession issues, it could also incur some costs and negate a few of the benefits of a DAF over a personal foundation.
Discuss this feature with the DAF before opening a DAF account.
