The 2023 DAF Report compiled by the National Philanthropic Trust shows donor-advised funds (DAFs) continue to be a popular choice for charitable giving. Among the highlights of the report:
- Contributions to DAFs reached $85.53 billion in 2022 – a 9% increase from 2021 and 2018’s contributions.
- Grants from DAFs to charities reached 52.16 billion in 2022 — a 9% increase from 2021 and twice 2018’s grants.
- The number of individual DAF accounts at the end of 2022 was 1,948,545.
- Annual aggregate grant payout rates from DAFs remain consistent, exceeding 20% in every year on record.
As more of your charitable-inclined clients may be interested in establishing a DAF as a possible giving option, here are the essential DAF rules to share with them for 2024.
What is a DAF and how does it work?
A DAF is a charitable giving account that allows individuals to donate funds, receive immediate tax benefits, and recommend grants to support their favorite charities over time.
To start, donors make an irrevocable gift to a sponsoring charity, after which the charity opens an account listing the donors as a grant advisor. The sponsoring charity, an 501(c)(3) organization exempt from tax, owns the assets and investments within the DAF. Donor gifts include cash, publicly traded securities, and, depending on the sponsor, even real estate, alternative investments, or closely held business interests.
Donors will avoid income tax on appreciated assets and become eligible for a charitable tax deduction during the same year the gift is given. The donor can combine years’ worth of charitable donations into one year, a tax strategy known as bunching that works ideally with a DAF.
From a DAF, the grant advisors named by the donors can recommend grants to many publicly supported 501(c)(3) charities. Children and other family members can be added as grant advisors to establish a legacy of charitable giving.
While every sponsoring organization may have its own rules or guidelines for the DAFs that they manage, the following DAF rules will apply to every sponsor and sponsored account:
- While there are no IRS-mandated limits on how much a donor may contribute to or grant from a DAF, sponsors may require a minimum contribution and/or a minimum annual grant amount. A DAF might be required to keep a percentage of its assets in liquid investments such as money markets or publicly traded securities.
- All contributions to the DAF are irrevocable and cannot be taken back once gifted. All donated assets belong to the sponsoring organization, with the donor maintaining advisory and grantmaking privileges.
- All grant recommendations from DAFs must be approved by the sponsoring organization. A grant recommendation can be rejected if it does not abide by the organization’s standards or guidelines.
- All grants must go to an approved private operating foundation or a public charitable organization recognized by the IRS. All grants must be approved by the DAF sponsor and can support qualified charitable initiatives including:
- religious and social service organizations
- food banks and hunger alleviation
- arts and culture
- the environment
- animal welfare
- educational institutions
- DAFs may be used to support an existing or start a new scholarship fund at any eligible charitable organization or institution. However, the grants cannot support scholarships where the donor or any family members may be eligible recipients. The grant also may not be used to pay the tuition of any specific individual.
- No grants can be made from a DAF to benefit a specifically designated individual.
- Donors cannot receive a personal benefit from DAF grantmaking, nor their advisor or any family member except the charitable deduction. Also, grants from a DAF cannot be made to political parties or candidates, private non-operating foundations, or certain supporting organizations.
- Donors may not use DAF funds to fulfill a personal, legally binding pledge. The donor can make a recommendation to the sponsoring organization for multi-year commitments that are not treated as a legally binding pledge.
- DAF grants cannot be used to pay for tickets to events, galas, or auctions or used to cover membership fees unless the cost is fully tax deductible. Grants cannot be used to pay for items or services purchased or won at a charity auction.
For the full list of restrictions, explanations, and guidelines established by the federal government, see the donor-advised fund guide sheet on the IRS website.
DAF tax deductions
DAFs are popular choices for charitable-minded donors not just for their flexible giving options, but also for their tax benefits. Immediately following a DAF contribution, donors are eligible for a tax deduction in that calendar year.
- Donors can receive an immediate income tax deduction for cash, check, or wire transfer of up to 60% of adjusted gross income (AGI).
- The deduction for securities and other appreciated assets (i.e., closely held stock, real estate, illiquid assets) is up to 30% of AGI.
- Any donations that exceed AGI limits can be carried over for up to five tax years.
- Gifts of tangible personal property, such as vehicles and collections, subject to additional limits and considerations.
- Charitable deduction further limited if asset has a debt attached.
- Donors incur no capital gains tax and no estate/gift tax on gifts of long-term appreciated assets.
- Investments within a DAF will appreciate tax-free.
- The donor may prefer to “bunch” two to three years’ worth of giving to a DAF to offset a windfall event and choose the charitable recipients over time.
Strategic DAF contributions to maximize tax benefits
Consider these ways to contribute to a DAF and maximize the benefit of the contribution:
- Contribute appreciated non-cash assets, such as:
- Stocks, bonds, and mutual fund shares
- Real estate
- 401(k) funds when the DAF is named as a beneficiary. (DAFs are not eligible recipients of a qualified charitable distribution from an IRA or qualified plan.)
- Use a charitable deduction to help offset the tax liability from:
- Roth conversions
- Windfall events (bonus, lottery)
Additional considerations for DAFs
DAFs are highly valued for their flexibility and ease in establishing a legacy of giving. It is important to note that there are a few conditions unique to DAFs:
- Unlike most other charitable vehicles, DAFs do not have start-up costs or annual income tax, though they do come with annual administrative costs and investment fees. Gifts of business interests or property subject to a debt might subject the DAF sponsor to unrelated business income tax (UBIT); sponsors might require reimbursement from the DAF for UBIT attributable to the gift.
- Donors must understand that contributions to DAFs are irrevocable. While donors do maintain advisory and grantmaking privileges for their DAF, once assets are gifted to the account, they belong fully to the sponsoring organization and cannot be taken back.
- Depending on how it is set up, and the restrictions of the sponsoring organization, a DAF may have certain rules or limitations, such as restrictions on specific types of charities.
- While DAFs currently have no annual distribution requirements per statute, sponsors may require annual or semi-annual donations from the DAF.
- The sponsoring charity may place a limit on the number of successor generations. One DAF could be established to last only for the duration of the donor’s lifetime, while another may be passed on to successive generations in perpetuity or even become part of the organization’s general endowment.
- The sponsoring organization and fund management could face federal penalty excise taxes for the misuse or abuse of DAFs.
What are the benefits of a DAF?
The many benefits of DAF include: Immediate tax deductions, streamlined giving, flexibility in grantmaking, ability to donate anonymously, and legacy donations that will continue after a donor has died.
How is a DAF different from a private foundation?
DAFs are typically easier to start because there are no associated costs and no grant distribution requirements. Tax deduction AGI limits are higher with DAFs, and donors can remain anonymous. With private foundations, donors have more say in the use of their funds, must distribute 5% of average net asset value annually, and are subject to annual 1.39% excise tax on net investment income. Private foundations must also comply with public inspection requirements, which limit the anonymity of individuals associated with the foundation.
Who is responsible for overseeing DAFs?
The charitable organization sponsoring DAFs is responsible for oversight and management of its DAFs, including complying with IRS and state requirements for charitable organizations. The sponsoring charity will investigate charities recommended for a grant to ensure they meet IRS requirements for DAFs. The sponsoring charity should also issue contemporaneous written acknowledgement of a gift to the donor per IRS requirements.
What is the responsibility of the donor to a DAF?
The donor shall retain all documentation related to the original acquisition and transfer of the gift to the DAF. The donor shall also obtain a qualified appraisal, if required, and properly report noncash donations on Form 8283.
That is all the essential information for the current 2024 calendar year. If you or your clients have other questions about DAFs or their rules and restrictions, we can help. Ren can administer the DAF and manage the reporting, accounting, compliance, and client case consulting so that you can focus on other areas of your clients’ investments.