by Alan Hill, Chair, UCG Board of Business

This is the second of a three-part series on advanced ways to financially support your United Church of Gainesville. In part one we learned about qualified charitable distributions (QCD’s) from a traditional individual retirement account (IRA) for persons at least 70½ years old. In this part we will describe the use of donor-advised funds that the sponsor can use to direct grants to charities, especially UCG.

DONOR ADVISED FUNDS

For members who are not yet 70½ years old a donor advised fund can be a way to set aside funds for future charitable given while reaping the tax benefit of deducting funds placed in a fund now.

What Are Donor Advised Funds?

Donor Advised Funds (DAFs) are charitable giving vehicles that allow individuals, families, or organizations to contribute assets to a fund, receive an immediate tax deduction, and recommend grants to charitable organizations over time. DAFs are popular due to their flexibility, efficiency, and ability to support strategic philanthropy.

How Do Donor Advised Funds Work?

Setting up a DAF is simple. First, a donor establishes a fund at a sponsoring organization, such as a community foundation or a financial institution with charitable services. The sponsoring organization, including a fund with a financial institution, is itself a charitable organization with tax exempt status from the IRS. Before establishing a DAF, be sure that the sponsoring organization allows gifts to religious organizations. The rare exception might be a community foundation that restricts the grants donors can make to local or economic causes.

Once a DAF is established the donor then contributes cash, securities, or other assets, which are eligible for a tax deduction right away. After contributing, the fund can grow tax-free, and donors can recommend grants to IRS-qualified charities, including United Church of Gainesville, whenever they choose, allowing for both immediate and long-term giving strategies.

Benefits of Donor Advised Funds

Immediate Tax Benefits: Donors receive a tax deduction in the year they contribute to their DAF, even if the charitable grants are made in future years. Donors can deduct up to 60% of their adjusted gross income for cash contributions and up to 30% for appreciated securities.
Flexibility in Giving: Donors can take time to decide which charities to support, how much to give and when, making thoughtful and strategic grant recommendations over time.
Investment Growth: Assets in a DAF can be invested and have the potential to grow, increasing the amount available for charitable giving.
Privacy: Donors can choose to remain anonymous when making grants to charities, offering an extra layer of privacy.
Simplified Recordkeeping: DAF sponsors handle the administrative work and tracking, reducing paperwork for donors. Lower administrative costs compared to private foundations.

Disadvantages of a Donor Advised Fund

The donor loses ownership of the contributed assets. They will belong to the fund. When setting up a donor advised fund, be sure that the fund will allow grants to religious organizations. Grants are only allowed to IRS-qualified charities, which UCG is one. Giving to individuals or for scholarships is not allowed.
Potential for the sponsoring organization to override the donor advice.
May have a limited lifetime depending on the sponsoring organization. A foundation may exist in perpetuity, while some sponsoring organizations impose a “sunset” on donor-advised funds, after which they collapse individual funds into their general charity pool.

Who Should Consider a Donor Advised Fund?

DAFs are well-suited for individuals or families who want to make a significant charitable impact, maximize tax benefits, and streamline their giving. They are also ideal for those who have experienced a financial windfall, such as selling a business or receiving an inheritance, and want to set aside funds for philanthropy over time.

Making an Impact Through DAFs

Donor Advised Funds offer a practical and impactful way to support the causes you care about. By combining tax advantages with flexibility, DAFs empower donors to be more strategic in their philanthropy. Grants can be made as your annual pledge to UCG and/or when a special need arises that you feel strongly enough about to support.

What happens to my DAF when I die?

Once the account owner has died and can no longer “advise,” the DAF could become an “orphaned donor advised fund.” The funds would then become unrestricted assets of the sponsoring charity. Before setting up a DAF, check with the sponsoring organization about your options on how funds will be dealt with upon your death. Depending upon their policies, you may be able to:

Name one or more successor advisors
Distribute your DAF to one or more new donor advised funds
Provide a standing recommendation for final grants to one or more charitable organization to zero out the fund balance
Establish a program of recurring grants, much like an endowment
Transfer your DAF assets to a “field of interest fund” from which the sponsoring charity an make grants within broad categories.

Getting Started

If you are interested in opening a Donor Advised Fund, start by researching sponsoring organizations and considering your charitable goals. Speak with your financial advisor or tax professional to determine how a DAF fits into your overall financial and philanthropic plan.