Charitable Giving Through Donor-Advised Funds

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A donor-advised fund, or DAF, is a giving vehicle individuals may establish at a public charity (the sponsoring organization) such as the Jewish Communal Fund. A DAF allows donors to make a charitable contribution, receive an immediate tax deduction, and then have grants from the fund paid out to charities over time.  Donors can contribute to the fund as frequently as they like, and then recommend grants to their favorite charities whenever it makes sense for them.

The DAF is a dedicated account within the sponsoring organization specifically earmarked for the donor's wishes. The donor may even name the account (for example, The Sullivan Family Fund). Donors technically "recommend" that the sponsoring organization make a grant to a charity, and such recommendations are generally approved so long as the charity is an IRS-approved tax-exempt charitable organization. While the funds are in the DAF, donors may typically have them invested tax-free in mutual funds offered by the sponsoring organization.

A DAF can be a strategy to reduce tax burdens in a year with exceptionally large income like the sale of a business or other windfall. A large donation can be made to receive an immediate tax deduction in the year of the high-income event. Under last year's tax law, cash contributions may now be deducted against up to 60% of the donor's adjusted gross income (AGI). By donating to a DAF, a large donation from a single high-income event can be taken in the year of the extra income, and the funds can effectively pre-fund years of charitable giving.

Giving appreciated assets such as securities, mutual funds, and real estate is one of the most common ways to fund a DAF. This is a particularly tax-efficient method because assets that have been held for more than one year will provide a charitable donation equal to their fair market value, but not be subject to capital gains tax. If a donor were to instead sell assets personally and donate the net proceeds to a DAF or other charity, the amount available for the charity would be reduced by the capital gains tax. Appreciated assets are considered capital gain property which may be deducted against up to 30% of the donor's AGI. Any donations that exceed AGI limits receive a five-year carryforward deduction.

Satisfying a Pledge with a Donor-Advised Fund
May a donor recommend that his or her DAF account make a donation which the donor has previously pledged to a charity? If the donor's pledge is considered legally enforceable under state law and not merely an indication of charitable intent, making the pledge through a DAF might be considered to be more than an incidental benefit to the donor - in effect, the satisfaction of a legal debt. This would constitute a prohibited act of self-dealing by the DAF's sponsoring organization.

In IRS Notice 2017-73 (12/4/17), the IRS stated that it is considering issuing proposed regulations to clarify the matter. The distribution would not be treated as more than an incidental benefit to the donor if the sponsoring organization makes no reference of the existence of a charitable pledge when it makes the distribution to the charity. The rule would apply only to donor-advised funds, and not, for example, to payments made by private foundations with respect to pledges made by its contributors. The IRS has not yet issued the proposed regulations contemplated in Notice 2017-73.

 

Contact your LM Cohen professional to find how donor-advised funds and appreciated securities may fit into your charitable giving strategy. All our tax alerts are available on the Updates page of our website.

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