Donor-advised funds (DAFs) have become increasingly popular as a way to make charitable gifts. DAFs are charitable entities set up by sponsoring organizations, such as private financial services companies or local charities. Individuals can set up an account at a DAF and contribute money or property, qualifying for a charitable contribution deduction. The DAF then invests the funds, allowing for potential growth over time. Donors also have the ability to recommend which charities receive contributions from the account.
While DAFs offer significant advantages, such as tax deductions and flexibility in charitable giving, there are some potential downsides that often go unnoticed. Some DAFs may have limits on the amount or percentage of contributions that can be made to a single charity, as well as restrictions on the number of charities donors can contribute to in a year. Additionally, donations to a DAF become the property of the DAF and are irrevocable, meaning donors lose control over how the funds are used.
One potential issue with DAFs is what happens to the account after the donor passes away or becomes incapacitated. Some DAFs have policies in place for successors to manage the account and recommend contributions, while others do not allow for successors or have limits on succession. It’s important for donors to consider estate planning for their DAFs and determine what will happen to the account in the future. They should also inquire about the flexibility of the DAF’s standard agreement and any restrictions on moving the account to a different DAF if needed.
One alternative strategy to consider is creating a trust to make DAF contributions instead of setting up a DAF account directly. The trust would allow for control over future contributions through the trustee succession process and the trust agreement’s guidelines. While this approach may address succession issues, it may also come with associated costs and drawbacks. Before opening a DAF account, donors should explore this option with the DAF provider to determine the best course of action for their charitable giving goals.
Overall, DAFs offer a powerful tool for charitable giving, but donors should be aware of the potential pitfalls and plan accordingly. By understanding the limitations of DAFs and considering alternative strategies, donors can ensure their charitable contributions are managed in line with their wishes both now and in the future. Consulting with estate planning professionals and discussing options with DAF providers can help donors make informed decisions about their philanthropic efforts.
