Explore a Versatile Estate, Legacy and Tax Planning Tool
If your financial position allows you to make charitable gifts, and to continue making them into the foreseeable future, then you have a number of vehicles available to carry out your wishes. One such instrument is known as a Donor Advised Fund (DAF) — and it carries some important benefits — particularly in the area of tax management.
In fact, you can generally deduct 100% your contribution to a DAF. However, your deduction for a cash contribution is limited to 50% of your Adjusted Gross Income (AGI) and your deduction for a contribution of appreciated securities, such as stocks, is limited to 30% of your AGI. And you are not limited to a “onetime” donation — one of the key benefits of a DAF is that it allows you to make additional contributions from year to year, which can help you generate additional income tax deductions
A DAF may also be a practical tool for estate planning and creating a family legacy for the future. It is not complicated to set up a DAF. Here’s how it works:
Step 1: Sign a “letter of understanding” that establishes the account, names it and recommends an investment strategy.
Step 2: Choose the type of DAF appropriate for your needs. You can select an “endowed fund” that invests your contribution in perpetuity and distributes earnings only. Or you can select a “nonendowed fund” that lets you (or someone you designate) make distribution recommendations up to the entire account balance (principal and earnings).
Step 3: Contribute the required minimum amount of assets, which can be cash, marketable securities or other types of assets, depending on the fund.
Step 4: Monitor your DAF. Throughout your lifetime, you (or your designee) can make ongoing, nonbinding recommendations regarding how much money the DAF should contribute to the charities you have chosen and how your contributions should be invested. Keep in mind, though, that, as its name suggests, a DAF is not obligated to follow your suggestions, though, in practice, most funds will honor a donor’s wishes.
Step 5: Incorporate your DAF into your estate plans. In your will or other legal instrument, such as a revocable living trust, you can direct your DAF to continue making grants to the charities you have named. You can also name a DAF as a beneficiary of an IRA.
If you are looking for a method of providing long-lasting contributions to charitable organizations while receiving repeated, significant tax benefits, take a close look at Donor Advised Funds. You might find them appealing — in many ways.
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