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The Less Obvious Advantages of Donor-Advised Funds

Donor-advised funds (DAFs) have taken their place among oft-used vehicles to promote one’s charitable interests. DAFs are often described as having the deduction benefits of a public charity but the control benefits of a private foundation. While this is true to some extent, there are many reasons why one should carefully consider the different ways in which one can give. This article will point out a few more subtle advantages of DAFs, or DAF tactics, if you will.

DAFs can be used to prevent tipping a public charity’s support percentage below the 33% threshold. A nonprofit will be able to count a DAF contribution as 100% public support, thus not subjecting the gift to the 2% limitation. This can be especially helpful to young organizations where a few unexpected or large gifts inadvertently put an organization in private foundation territory. I, for one, would rather avoid the facts and circumstances test if possible.

DAFs can be set up by private foundations. In fact, some advisors think that every private foundation should have a DAF. Contributions to a DAF by a private foundation will count toward the private foundation’s minimum distribution requirement. This is a fantastic pressure release valve for large private foundations or those that are subject to large swings in investment income. And, of course, it is great insurance for those private foundations that file their returns 10.5 months after year end and are notified by their tax preparers that an additional $100,000 must be paid out within 45 days.

Anonymity…Many donors are not confident that the IRS or their respective state will ensure anonymity with respect to contributors. Certainly, a contribution coming from DAF #54321 is less obvious than the Fischer Family Foundation (no relation)!

From an individual donor’s perspective, the DAF can offer certain timing advantages. If you know you will be itemizing in the current year but not itemizing in a subsequent year, front-loading your charitable giving via a DAF is tax-advantaged. You may maintain a steady flow of giving but not lose the charitable contribution in the non-itemizing year. This concept can be applied over a longer period of time where you are likely to stop itemizing in later years.

Similarly, a DAF may be used to offset tax during a Roth conversion. Roth conversions can produce large tax bills, albeit for a short amount of time. Funding a DAF during the conversion for future giving will lessen the conversion tax bite and secure your giving for some time going forward.

If you have questions regarding your organization’s activities in connection with any of the topics discussed above, please contact Ryan Fischer at or toll free at 844.4WINDES (844.494.6337).
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