For many people, estate planning goes beyond simply passing on wealth. It’s also an opportunity to leave a lasting impact on the causes that matter most.
A donor-advised fund (DAF) can be a powerful tool in your overall legacy planning strategy. It enables you to support the organizations you care about, both during your lifetime and after, while offering flexibility, potential tax benefits, and a structured approach to building a charitable legacy.
In this article, we’ll outline how donor-advised funds work, their benefits in estate planning, and key considerations to evaluate before making them part of your long-term strategy.
Understanding Donor-Advised Funds
A donor-advised fund is a charitable giving account that allows you to contribute assets, such as cash, stocks, or other investments, for philanthropic purposes. Once your contribution is made, you may be eligible for an immediate tax deduction, subject to IRS limitations based on your adjusted gross income and the type of asset you contributed. From there, the funds remain in the account and can grow over time until you recommend grants to qualifying charities.
While a sponsoring organization, often a public charity or financial institution, technically owns the assets, you may retain advisory privileges over how the funds are distributed. This arrangement can give you the ability to strategically time your giving, support multiple charities, and involve your family in your philanthropic decisions.
Benefits of Incorporating DAFs Into Your Estate Plan
There are several reasons why DAFs are often included in estate plans, especially for those who want to give meaningfully and strategically.
Tax Efficiency
Contributing to a donor-advised fund may provide an immediate income tax deduction in the year you make the donation, even if you distribute the funds to charities over several years. You can also avoid capital gains tax on appreciated assets donated directly into the fund, helping to maximize the value of your charitable contributions.
Simplified Giving
Rather than managing multiple donations to various charities, a DAF consolidates your giving into one platform. You make a single contribution, receive one tax receipt, and direct grants to your chosen organizations on your own timeline.
Legacy Continuity
A DAF can become a valuable part of your legacy planning. You can name successors, such as children or grandchildren, to continue recommending grants after your passing. This encourages family involvement and keeps your philanthropic values alive for generations.
Privacy and Anonymity
Unlike direct donations, DAFs offer the option to remain anonymous, which can be useful for donors who value discretion or want to avoid unsolicited fundraising appeals.
Considerations and Potential Drawbacks
While DAFs offer a range of benefits, they may not be the appropriate fit for every estate plan. Before proceeding, it’s important to consider some of the limitations, which include the following:
Lack of Direct Control
Once you contribute assets to a DAF, the sponsoring organization legally owns the funds. While you can recommend how the money is distributed, they’re not legally bound to follow your instructions, though most reputable sponsors do honor donor wishes.
Grant Restrictions
DAFs can only issue grants to IRS-qualified 501(c)(3) public charities. That means you cannot use them to fund private foundations, political campaigns, or personal endeavors, even if those activities align with your values.
Fees and Investment Choices
DAFs typically charge administrative fees and offer a limited selection of investment options. While these are often lower than the cost of managing a private foundation, it’s important to understand the fee structure and how it might affect the fund’s long-term value.
Timing of Charitable Impact
Although the tax deduction is immediate, the funds may not reach charities right away. This delay can be beneficial for planning purposes. However, if you want to create an immediate impact, you will need to actively manage your grant recommendations.
Implementing DAFs in Estate Planning
If you’re considering a donor-advised fund in your estate plan, there are several ways to structure your giving and align it with your broader goals.
Contribute During Your Lifetime
Many donors choose to open and fund their DAF during their lifetime, allowing them to experience the impact of their giving firsthand. This approach can also provide immediate tax benefits and gives you time to shape your philanthropic strategy.
Assign DAF to Receive Proceeds
You can direct proceeds from your retirement account, life insurance policy, or trusts to a DAF by naming the sponsoring organization as a beneficiary. Because public charities operate donor-advised funds, they do not pay income tax on assets received, making them an efficient vehicle for passing along tax-deferred assets.
Include DAFs in Your Will or Living Trust
Some individuals choose to include a bequest to a DAF in their estate documents. This can either create a new fund or contribute to an existing one. If you want to maintain control over how the fund is used, you can draft a non-binding letter of intent outlining your charitable goals and preferred recipients.
Engage Your Family
DAFs are uniquely suited for multigenerational giving. You can involve your family in discussions about charitable values and invite them to participate in grant recommendations. This fosters a shared sense of purpose and creates a charitable legacy that extends beyond your lifetime.
Start Your Legacy of Giving Today with Wiles Law
A donor-advised fund can help you make a meaningful, long-term impact while also simplifying your charitable giving and offering significant tax advantages. However, integrating a DAF into your estate plan requires more than good intentions. It takes careful planning, legal insight, and a strategy tailored to your unique goals.
At Wiles Law, our experienced estate planning attorneys help clients build charitable legacies with purpose and clarity. We offer personalized legal guidance that helps protect your assets, helps minimize tax exposure, and aligns your estate plan with the causes you care about most.
From trust formation and charitable giving strategies to probate support and trust administration, we provide the comprehensive services needed to support your family and philanthropic goals.
Contact Wiles Law today to schedule a consultation.