What are the benefits of creating a DAF compared to contributing directly to a charitable organization?
Due to its flexibility, there are many benefits to establishing a DAF to manage your philanthropic goals. The most obvious advantage is the ability to centralize your charitable giving through one location, your donor advised fund. With a DAF, you can direct all of your tax-deductible gifts to the DAF and from that fund make grant recommendations to any qualifying charity. Instead of having to manually track all your contributions at the end of the year, all of your contribution activity is consolidated in your DAF. This allows a donor to better track their charitable giving history as well as simplify their tax preparation.
Establishing and utilizing a DAF can also potentially provide a donor with large tax-saving benefits. With a DAF, a donor can utilize a tax strategy referred to as “bunching.” Under this strategy, a donor can make a large gift in one year, then distribute this amount through grants to charities over several years. A donor is eligible to deduct a contribution to their DAF in the year the contribution was made, regardless of what year grants were subsequently distributed to another charity. For many donors, there is a substantial tax benefit to make a $50,000 contribution in one year, compared to giving $10,000 to a charity over five years. In addition to the “bunching” tax benefit, assets held in a DAF can grow tax-free. If the above referenced $50,000 contribution generated $10,000 in investment income over the time period it was held in a DAF, the investment income is not taxable to the donor.
Establishing a DAF with Knox County Foundation also allows for more complicated gift strategies than many other charities are comfortable supporting. Again for tax purposes, many donors find it more beneficial to donate stocks and other assets instead of a simple cash gift. The Foundation can work with you, and your tax advisor, to structure contributions to maximize any potential tax benefits.
One final benefit of a DAF also worth mentioning is the ability to keep any charitable giving anonymous, if the donor prefers doing so. Any DAF can be established anonymously with an anonymous gift. Alternatively, a donor can identify specifically what grants they prefer to be given anonymously to another charity. This allows a donor to support a cause that is important to them without allowing any other parties, including the charity benefited, to know the source of the grant.
What charitable purposes can I support from my DAF?
Grants from a DAF can be made to any IRS qualified 501c3 public charity, most churches or places of worship, and governmental agencies such as libraries, police and fire departments and schools. However, there are certain limitations and restrictions regarding allowable distributions from a DAF. A DAF can never make a grant directly to an individual or indirectly to a charitable entity for the benefit of a specific individual. Also, a donor can’t make a grant from their DAF where they receive a personal benefit such as membership, tickets or access to a gala or similar event. On a similar note, distributions are disallowed for purchases at a charitable auction as well as any goods purchased from a nonprofit organization.
Individuals with a DAF must also be very careful when considering multi-year grants to a non-profit organization. Internal Revenue Code prohibits a DAF from relieving a donor’s financial obligation which includes legally enforceable pledges. Rather than making a pledge which could be a legally enforceable obligation, a donor with a DAF may make a non-binding letter of intent to support an organization for a period of years. This letter would state the donor’s intent to recommend a grant from their DAF for a period of years but makes it clear that no legal obligation exists for future payments.
Why establish a DAF with KCF instead of a national provider?
Due to the explosive growth in the usage of DAFs, donors have many choices when it comes to establishing a fund. Most DAFs are held by either community foundations or national brokerage firms such as Fidelity and Vanguard. However, we strongly believe there are several distinct reasons for a donor to maintain a DAF with Knox County Foundation. If your charitable giving is focused on local needs within our community, we can offer more guidance and support than a nationally based DAF program. Our goal is to connect our donors with our community. If they so elect, we inform our donors of upcoming charitable programs that have been reviewed and approved by our distribution committee. A donor can meet with our staff at any time to discuss their charitable goals and the options that exist to best accomplish them.
Our donors also appreciate our ability and willingness to meet with their advisors to assist with tax and estate planning. Knox County Foundation can be a valuable resource when considering the most efficient and effective methods to establish a charitable legacy. Donor advised funds are a useful tool for individuals during their living years. However, it is important to also plan for your charitable intentions after death. We can work with your advisors and your family to find the best solution to carry on your legacy. Maybe this involves establishing a permanently endowed fund or perhaps this is accomplished by making the next generation advisors for the DAF. There are many options to consider during your life, as well as after, and we can support you through these decisions.
Can I have multiple advisors for a DAF including other family members?
Yes. In fact, many of our DAFs operate in a fashion similar to a private family foundation but without the complexity or associated costs. Some donors elect to establish a family fund that allows for multiple primary advisors that can make grant recommendations. Other donors may elect to have only one or two primary advisors (parents) who make recommendations after convening a charitable planning meeting with their extended family.
Another option many donors appreciate is the ability to establish a legacy of giving by naming other individuals as contingent advisors. After the primary advisors have passed, the DAF fund agreement can name subsequent contingent advisors, often children, to continue to advise and support the fund.
How do I recommend a grant from a DAF?
Knox County Foundation strives to make the process as simple and quick as possible. Any fund advisor authorized to make grant recommendations may login to their Donor Portal account and submit a request or complete a Donor Advised Grant Request Form which is then submitted to the Foundation. This form provides relevant information about the grant request including the benefiting non-profit organization, the amount, whether the grant is recurring or not, as well as how the donor wishes to be acknowledged or if they wish to be anonymous.
Due to IRS requirements, any grant request made by a donor is considered a “recommendation”. The Foundation Board will review the grant request to ensure it is consistent with donor-advised fund guidelines and to verify the designated beneficiary is eligible to receive a charitable grant from a DAF. Upon approval by the Foundation Board, we will generate a disbursement check payable to the non-profit organization. Depending on the donor’s wishes, we can either mail the check to the organization along with a cover letter detailing the donor’s gift and wishes or the donor can give the check directly to the organization. From submission of the request to generating the grant disbursement, the process generally occurs in under two weeks.