Charitable giving — To Set Up a Donor Advised Fund or to give directly?

BY Brian S. Roth

As many clients are thinking about end-of-year giving, a Donor Advised Fund ("DAF") may be an option for someone who is looking for flexibility and control in their charitable giving plan.

With a DAF, a donor can put away money and get a charitable tax deduction in the year of the contribution. A DAF allows the donor to spread donations to various organizations over time. Once the DAF is funded, the account may be invested and can grow tax-free. A DAF can also reduce recordkeeping requirements as only the receipts from the contributions to the DAF are needed for the donor's tax return. If cash contributions are made to the DAF, the donor can get a tax deduction of up to 60% of the donor's adjusted gross income ("AGI") in the year of the contribution. However, a donor can also contribute less liquid assets such as cryptocurrency, shares in privately owned corporations, and membership interests in limited liability companies. Finally, a DAF can allow the donor to remain anonymous if that is important to the donor.

Nevertheless, there are some negative aspects to maintaining a DAF. DAFs are subject to many of the same strict compliance rules as private foundations. Investments made in the DAF account are subject to market risk and can decrease over time. Furthermore, contributions can be made only to public charities. Thus, giving directly to a charity may be a better option for someone who is looking for simplicity.

Moreover, in 2020, there may be a significant benefit to contributing directly to a charitable organization. For 2020 only, you are able to get a tax deduction of up to 100% of AGI for cash contributions made directly to public charities. In contrast, the 100% of AGI tax deduction is not available if the cash contributions are made to a DAF.

When thinking about giving money to a charity, you should consult with your advisors to develop a charitable giving plan that aligns with your long-term goals. Strong consideration should be given to the potential tax benefits of any charitable giving structure. A DAF may be an option for someone who is unsure of which charitable organizations to donate to presently but is looking for a vehicle to make gifts over time while getting the benefit of a current year charitable tax deduction.

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Brian S. Roth


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