As we start to round third base and head home in the year 2026,I’dlike to continue our conversation about this being the year of abundance and how to give our money away. As I mentioned last month, sometimes we can over-engineer our financial strategies…but having smart, straight forward financial plan in place is always a good idea. So,let’schat about a strategy rising in popularity these past few years since the tax laws keepchangingdonor-advised funds (DAF).
The DAF has gone mainstream in the past decade but dates to the 1930’s when John D. Rockefeller Jr wanted more donor control than the community foundation’s board structure. In 1991, the first commercial DAF was started by Fidelity Investments and today, according to National Philanthropic Trust, DAFs in the U.S. outnumber charitableremaindertrusts, charitableremainderannuity trusts, charitable lead trusts, pooled income funds, and private foundations combined. I’dqualify forthat as being popular.
Like their charitable trust counterparts, a donor can contribute cash, securities or other assets into a donor-advised fund hosted by a 501(c)3 sponsoring organization. Often a charitable arm of a large money manager, DAFs can also be sponsored by individuals, families, and businesses. The donated funds are irrevocably given to the DAF;thus,the donor gives up legal control in exchange for an immediate tax deduction. The sponsoring organization is now the legal owner of the funds and willfacilitatethe monies being given to qualifying non-profit organizations per the donor’s suggestions.
Some noteworthy advantages: An investment in a DAFcangrowtax-free, allowing formorepotential growth before the grants are madeto the charities. It can also be a low-cost / low compliance alternative to a private foundationsince the sponsoring organizationis responsible forIRS reporting and issuing checks to receiving charities.
Some noteworthy disadvantages: Be mindful of the deductibility caps of cash versus hard assets since the IRS puts limits on how much tax deduction can be taken based on the donor’s income. Also, the loss of the ultimatesayon who the donated monies are given to. While your intended charity may qualify as a 501(c)3, the DAF may haveitsown set of parameters necessary to recognize your intended charity to receive the donated funds.
Not to be a buzz kill, but not all DAF accounts may be legitimate. TheIRSwarnstaxpayersof abusein this community,sopleasedo your due diligence before choosing your sponsoring organizationand accepting their claims of DAF status.And if you feel it is in your best interest to have a DAF as an intermediary between yourself and your charity of choice, please confirm your intended charity is recognized by the DAF since this communication loop is driven by the donor…not the charity itself.
Kimberly Enders CFP® CPFA
CERTIFIED FINANCIAL PLANNER®
Enders Wealth Management
37800 Van Dyke Ave, Suite 125
Sterling Heights MI 48312
#kimenderscfp
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
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