There’s little doubt that the more restrictions you put on a donor-advised fund (DAF) program, the less attractive it becomes to donors. If you limit where donors can invest, restrict where they can recommend grants, and set initial contribution amounts too high, the potential for donors to want to participate is reduced.
This could be the root cause for why many nonprofit organizations that want to focus a donor’s charitable giving dollars on their specific missions shy away from a DAF option. But what if there was a way to set up the fund to direct a specific percentage of recommended grants to the sponsoring charity, and still allow discretionary granting of charitable dollars to other qualified nonprofits of a donor’s choosing?
Enter the split-fund DAF. With this DAF model, donor contributions are received and split between a designated fund and a discretionary fund. Those assets are invested in pools as determined by the sponsoring charity with the purpose of increasing the value of the fund over time and giving the donor more giving potential.
The sponsoring charity also sets a percentage of grants from that fund that must be recommended to them. Over the course of time, donors may recommend grants from the designated fund only to the sponsoring charity and its initiatives. Donors may also recommend grants from the discretionary fund to support any permissible charitable organization, including, but not limited to, the sponsoring charity. This assures the sponsoring charity will receive guaranteed gifts over the course of the fund’s life and allows donors to retain an element of control over their philanthropic goals.
Like any other DAF program, donors have the flexibility to make gifts of many different asset types, including complex assets such as stock, real estate, or life insurance. Making gifts of complex assets allows a donor to avoid capital gains tax and still direct those dollars increasing the capacity to meet charitable goals.
The program administrator – in many cases the representative for the nonprofit working with their investment managers – also can choose investment pools that align with their particular social consciousness. From aggressive to conservative investment options, administrators can match investment strategies with charitable giving timelines, increasing a donor’s giving power through the fund’s investment returns.
Just like a traditional DAF model, the split-fund model still allows donors the flexibility to recommend grants when the timing makes sense. If the sponsoring charity is conducting a specific fundraising campaign, this charitable solution allows grants to be recommended from the fund during times of greatest need. If a donor is inclined to contribute to relief funding when disaster strikes, those funds will be in reserve for just such an occasion. Funds can also be used to meet annual tithing obligations and more.
Also, like the traditional DAF model, a split-fund DAF can be used to create a legacy of giving. It can be set up for planned giving opportunities and perpetual giving or to allow the remainder of the account to be granted to a charity of choice at death..
Finally, donors can use a “bunching” strategy to take advantage of charitable tax deductions to offset the standard deductions in off years with a split-fund DAF. By alternating charitable contributions to the fund with taking the standard deduction every other year, this strategy can maximize tax savings while still retaining charitable consciousness. It really is the best of both worlds.
So, if you are a nonprofit organization in the market for a DAF program but have been unsure about how to ensure funds would be directed to your specific cause, a split-fund DAF could be the answer you’re looking for.
Contact us to find answers to any of your other charitable planning questions.