Donor-advised funds

Give a gift with future flexibility

A donor-advised fund (DAF) is a flexible, tax-savvy way to set aside funds to support the charities and organizations you care about most, like Indiana University. It’s a contractual relationship between a donor like you and a sponsoring organization, such as Fidelity, Schwab or independent charitable foundations. After designating a charitable contribution, the sponsoring organization owns the assets and administers the fund. You retain advisory privileges over the charitable donations that are distributed from the account. This arrangement qualifies you for an immediate income tax deduction for the amount of the contribution, even though funds won’t be distributed until you suggest supporting a specific charity, such as Indiana University.

A DAF offers remarkable versatility in letting you choose how and when to give. This unique “hands on” philanthropy is a personally satisfying giving option that also provides freedom from the administrative responsibilities of managing the account, including investment decisions.

How donor-advised funds work

  1. The donor makes a contribution to the sponsoring organization.
  2. The donor qualifies for an immediate federal income tax charitable deduction, subject to limitations. A donor must itemize to receive a deduction for a charitable contribution.
  3. The donor makes recommendations for distributions to charity.

Donor-advised funds offer increased appeal

Because the standard deduction increased significantly under the 2017 tax law, fewer people are itemizing on federal returns. Those who want to make the most of their charitable deductions in a single year may find it makes sense to “bunch” donations so they reach the threshold amount that is required to take a deduction that exceeds the standard deduction. An effective way to accomplish this goal is with a donor-advised fund.

When you contribute to a DAF, your gift qualifies for a charitable deduction in the year of the gift. This means you can make a large, tax-deductible contribution to the DAF in one tax year and delay giving from your account until later years.

Advantages of DAFs

There are many ways to make meaningful, personally satisfying gifts. So why are DAFs rising in popularity? Here are some key DAF benefits to keep in mind.

Advisory privileges

Although the sponsoring organization owns and manages the DAF and is legally required to retain ultimate authority over distributions, advisory privileges are the key reason why donors select this gift option. DAFs can meet charitable planning goals in sensible and pragmatic ways.

Example one

Camila is a highly paid consultant who just signed a long-term creative services contract that included a substantial up-front bonus. She will be able to benefit from an itemized charitable tax deduction this year, so she makes a major contribution to a DAF. Her goal is to support Indiana University on a long-term basis, specifically directing distributions to the work that makes a meaningful impact. Camila is particularly pleased that she can use this charitable strategy that meets her immediate needs while providing the flexibility to meet future charitable goals that are not yet specifically identified.

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Example two

Carter is about to receive a substantial inheritance from his father, and part of it is made up of retirement assets that will be taxable to him. Although he could opt to receive the retirement assets over time, he elects to receive them in full now. To offset the inheritance tax, he makes a tax-deductible contribution to a DAF. One of the motivating factors for Carter’s approach is the desire to honor his father’s memory by making an immediate donation to Indiana University from the DAF. He also appreciates the luxury of taking his time to consider how and when to make future donations. Carter benefits from a tax deduction now and looks forward to participating in meaningful philanthropy for years to come.

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Timing and tax deductions matter

As the examples illustrate, eligibility for a charitable tax deduction can be an important part of planning. Although the primary motivation behind giving is the desire to make a philanthropic impact, it is wise to consider timing realities and how a gift can benefit you as well as Indiana University. For instance, a particular year with a large or unexpected bump in taxable income can be an ideal time to consider a DAF because of the welcome tax deduction.

Example three

George and Sydney are nearing retirement and want to enjoy the benefits of a tax deduction while they are still working. They also want to segment their charitable funds from other funds set aside for planning purposes. With a DAF, they make a substantial contribution during their working years, then make their grants to Indiana University and other charities whenever the time is right for them.

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Planning considerations

The following questions and answers may help you determine how a donor-advised fund might fit into your personal planning.

No, they are not. Community foundations have been associated with DAFs for several decades. More recently, many different types of charitable organizations have established sponsoring organizations to administer DAFs. In addition, some financial companies have created sponsoring organizations. Each sponsoring organization can have unique rules regarding the donation required to begin the fund, how grants are made from the fund, and fees associated with the fund.

Generally, yes. However, as noted above, each sponsoring organization has its own rules.

Grants or distributions from a DAF must be made to qualified charitable organizations, such as Indiana University Foundation. The sponsoring organization may have requirements for grant amounts and frequency—remember that the sponsoring organization has ultimate legal authority over distributions from the DAF.

Some sponsoring organizations allow for the transfer of advisory privileges to another individual. Others allow you to designate a specific charitable organization, like IU Foundation, to receive all or a percentage of the funds in the account at the end of your lifetime.

A simple, rewarding philanthropic option

At their core, DAFs are remarkably simple. They allow you to make a single donation that can benefit one or more charities through multiple grants from the DAF at different future dates, with minimal constraints on the timing of those grants. DAFs can be highly rewarding and useful for donors who want to make a charitable commitment now, benefit from a current tax deduction, and retain the right to “fine-tune” grant distributions or make multiple grants in the future.

Please contact us for more information about DAFs and grants to Indiana University. It would be our pleasure to help you explore the possibilities associated with this flexible giving strategy.