Integrate a Donor-Advised Fund into Your Estate Plan
Posted by Robert Ingrasci on February 05, 2025
If you're someone who enjoys giving back, your estate plan can be an excellent way to make charitable contributions. One effective tool to consider is a donor-advised fund (DAF).
Why Choose a DAF?
A DAF offers several benefits. It allows you to allocate funds for charitable giving during your lifetime, and you or your heirs can direct donations over time. Additionally, you can designate your DAF as a beneficiary in your estate plan, ensuring that charitable giving continues in your name after your death.
Setting Up a DAF
To establish a DAF, you'll typically need an initial contribution of at least $5,000. These funds are usually managed by a financial institution or an independent sponsoring organization, which charges an administrative fee based on a percentage of the account balance.
You can fund a DAF through various estate assets and name it as a beneficiary of your IRA or 401(k) plan accounts, life insurance policies, or through a bequest in your will or trust3. You instruct the DAF on how to distribute contributions to your chosen charities. While you decide which charities to support, your contributions are invested and can potentially grow within the account. The chosen charities are vetted to ensure they qualify to accept DAF funds, and then the funds are distributed.
Benefits of a DAF
Using a DAF is relatively straightforward. The administrative work and logistics are handled for you, so you simply make contributions to the fund. It may even be possible to transfer securities directly from your bank account.
Contributions to a DAF are generally tax-deductible. If you itemize deductions on your tax return, the gifts can offset your current income tax liability. Monetary contributions can be deducted in the tax year you make them, rather than waiting until the fund distributes them6. For monetary contributions, you can write off the full amount, up to 60% of your adjusted gross income (AGI) in 2025. Any excess is carried over for five years. For a gift of appreciated property, the donation is equal to the property’s fair market value if you’ve owned the asset for longer than one year, up to 30% of AGI. Any excess is carried over for five years. Otherwise, the deduction for property is limited to your adjusted basis (often your initial cost).
If you prefer, distributions can be made to charities anonymously. Alternatively, you can name the fund after your family. In either case, the DAF can be created through your will, providing a lasting legacy.
Drawbacks of a DAF
However, DAFs have some drawbacks. You don't control how the charities use the money once it's disbursed from the DAF9. Additionally, you can't personally benefit from your DAF. For example, you can't direct the money to buy tickets to a local fundraiser if the cost of the tickets isn't fully tax-deductible. Lastly, some detractors have complained about the administrative fees.
Leave a Lasting Legacy
Incorporating a DAF into your estate plan can help maximize charitable giving, minimize taxes, and create a lasting legacy aligned with your philanthropic goals. It provides flexibility and allows heirs to continue supporting charitable causes in your name.
Contact us with any questions regarding a DAF.
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Bob is an experienced tax professional who devotes his professional time to structuring tax strategies in the areas of compliance, consulting, and planning. Bob works closely with a broad range of high-net-worth individuals and multi-generational families, specializing in the areas of gift and estate planning, charitable gift planning, trust and estate administration, individual taxation, and wealth preservation. Bob serves as a practice leader in the Family Wealth and Estate Planning group. Bob joined Lumsden McCormick in 2008 and was named partner in 2022.