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Donor Advised Funds Offer a Flexible Tool for Estate Planning

February 5, 2024 | By Katharine George, CFP®, AEP®
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Many people use Donor Advised Funds (DAFs) for tax-efficient charitable giving during their lifetime. See our article here on what a Donor Advised Fund is, and how it can improve efficiency and reduce taxes for charitably inclined individuals.

While many individuals recognize the high-level benefits of Donor Advised Funds, they can often be overlooked as an estate planning tool. If an individual plans to leave any portion of their assets to a charity or charities in their estate plan, it may make sense to utilize a Donor Advised Fund rather than name a charity directly in your legal documents. I explain why in this Insight.

How to utilize a Donor Advised Fund as an estate planning tool

For charitable givers, deciding how much to give and to which charities can be difficult, and one's wishes may even change over time. If a person lists charitable wishes directly in legal documents, they will have to incur a legal bill for consulting an estate attorney whenever they wish to make changes.

Naming a Donor Advised Fund in your estate plan, instead of a particular charity, provides a potential solution. Any changes to your giving priorities, or the structure of how you would like to give your assets, may be made at the Donor Advised Fund level through your Financial Advisor.

DAF Successor Options

A DAF offers flexible succession options that can evolve as your giving plans or family situation changes over time. Like DAF beneficiaries, they are defined within the DAF itself and do not need to be included in estate planning documents.

There are three different types of successor options for a Donor Advised Fund:

  1. Individual successor: This option allows an individual to name a person to take over the DAF ownership at their passing. The new owner can give to the charities of their choice, on their time frame.
  2. Charities: This option allows for an individual to name a charity or charities to receive the assets outright once transferred to DAF. This can be named in dollar or percentage figures. This strategy is effectively the same as if an individual had named a charity outright in their estate planning documents.
  3. Endowed Giving Program: Your DAF may be designated for an endowed giving program, which allows for recurrent grant recommendations for up to six charities for a minimum of five years (but extendable to 10, 20 or even perpetuity). Funds can be invested and continue to grow, with a fixed dollar or percentage amount donated to the charity or charities of an individual's choice until there are no more funds remaining in the Donor Advised Fund.

Designating a DAF for endowed giving requires a minimum balance of $100,000. This can be a great option for smaller charities that are not equipped to handle a large gift and would benefit more from a steady stream of income.

In short, a DAF can save on potential attorney fees while providing flexible options for giving assets to charity at your passing.

Using a DAF as Your Designated IRA Beneficiary

When it comes to deciding which assets to use for charitable intentions, it’s generally best to use retirement assets first. Distributions from inherited IRAs are taxed at ordinary income rates, whereas nonretirement assets get a step-up in basis resulting in little to no tax. If a charity receives the same funds from a retirement account, it will pay no taxes, receiving the amount in full.

For these reasons, it can often be advantageous to designate retirement accounts for charitable beneficiaries while leaving non-retirement assets to individual heirs.

Does giving through a DAF align with your personal financial goals?

Estate planning involves balancing many competing priorities, and we understand that the right balance will look different for each individual and family. DAFs provide a flexible vehicle for furthering your wishes while potentially driving tax savings that open up further giving from elsewhere in your estate.

We recommend working with your financial advisor to find an approach that aligns with your personal financial goals, circumstances and plans.

Interested in a deeper discussion of your estate plan? Schedule a complimentary 30-minute consultation with one of our financial planners today.

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