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A Fresh Look at Donor-Advised Funds for the Family Office

Posted by Amber Gutschlag, CPA on Dec 3, 2018 12:13:00 PM

Donor-advised funds (DAF) are increasing in popularity among high-net-worth and affluent families as a way to leave a lasting legacy. In addition to providing a flexible way to fund charitable giving for the future, DAFs offer families an attractive alternative to private family foundations.

What are DAFs?

A DAF is a charitable investment account, which can be funded with liquid and/or illiquid assets such as cash, publicly traded securities, and patents/royalties -- even closely held stock, artwork or life insurance policies through certain funds. Donors can make a charitable contribution of assets to the DAF and receive the maximum tax benefit allowed by the IRS in the year of the donation.  The donors can then make recommendations for grants to various public charities to be paid immediately or allow the assets to stay invested in the fund and be paid out as grants over time.

DAFs offer a number of benefits to families wishing to continue their tradition of philanthropy. Benefits include:

  • Unlike private foundations, DAFs do not have reporting/compliance requirements at the account level and do not pay excise taxes on their investment income.
  • DAFs are considered more affordable because family members can give without incurring the time and money that private foundations require; there are typically no start-up costs and often accounts require no minimum balance.
  • There is no requirement to recruit board members or maintain records of meetings.
  • Families have the ability to create a legacy and extend their philanthropy beyond their lifetime by naming successors and beneficiaries to their account.
  • Donors may give anonymously if they choose, and third-party contributors (such as matching contributions from an employer) are allowed.
  • DAFs are easy to establish—individuals, families and businesses can establish a DAF and immediately begin to make grants from it. 

Getting Started

DAFs require a parent organization, such as a community foundation or any qualified 501(c)(3) nonprofit that acts as the administrator of the fund over the lifetime of the fund. Some of the major brokerage firms now offer DAF options to their investors as well.  The organization will take on all of the accounting and investment management of the fund, as well as act as an advisor to help individuals achieve their specific charitable goals. Once the fund is established, additional donors can make contributions, which also qualifies as a charitable tax deduction. 

Tax Savings

The Tax Cuts and Jobs Act increased the annual adjusted gross income (AGI) cap for charitable contributions. Previously, a taxpayer could only donate up to 50 percent of their AGI in a given year, but now they can contribute up to 60 percent of their AGI—making charitable giving a more attractive tax strategy for philanthropic individuals.  A large donation to a DAF can help offset the taxable income of a donor in one tax year, while grants can be paid out over several years to charities - which smooths out funds for their organizational budgeting as well.

If a donor has stock that has been held longer than a year and has appreciated in value, they can realize significant tax savings by contributing to a DAF.  The charitable tax deduction is valued as the fair market value of the stock, rather than the basis of the stock.  As an added bonus, the individual will also avoid paying capital gains tax on the appreciation.           

Creating a Lasting Legacy

Perhaps one of the greatest benefits of DAFs has more to do with giving future generations the ability to honor the family’s philanthropy. Senior members of a family can get multiple generations involved by asking them to participate in the decision-making process regarding allocation choices. Eventually the younger members will play a greater role in directing all grant activity from the fund. A tax advisor along with other advisors can work with families to help guide the process along.

Questions about charitable giving for your family? We would be happy to discuss your strategy with you. Contact Amber at 972-818-5300.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article. 

Topics: HNW