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March 9, 2023
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A donor-advised fund (DAF) is a charitable giving vehicle used by individuals to manage charitable donations. It allows a donor to make an irrevocable contribution of cash, securities or other financial instruments into a DAF account. The donor surrenders complete ownership of and decision authority over the donated assets. However, the donor retains the right to recommend grants and make investment recommendations to the DAF. These funds are a tax-efficient vehicle for individuals who want to set aside money today to give to charitable causes in the future. Depending on your approach to philanthropy, it may be an appropriate solution to consider.

The good

  • Flexibility: There is no requirement to make distributions or payouts, which creates flexibility for the grant-making process from year to year.

  • Tax incentives: Contributions are tax deductible up to 30% of adjusted gross income (AGI) for appreciating securities, real estate, and other assets and 60% of AGI for cash gifts. There is no excise tax. Donors can avoid capital gains taxes by transferring appreciated equities to the fund.

  • Low costs: Lower registration, setup, and administration fees compared to other charitable gifting options, such as foundations or trusts.

  • Easy setup and maintenance: Setting up a DAF is as simple as submitting an application and providing an initial contribution. Ongoing maintenance is easy; the DAF handles administrative issues and donors have no reporting responsibility.

  • Growth: Investments within a DAF account grow free from estate and income taxes.

  • Privacy: Donor advisors, individual donors and grants can choose to remain anonymous.

The not so good

  • Lack of control: Donors relinquish legal control over all contributions to the DAF. In most cases the DAF follows donor recommendations. It is, however, possible for the DAF to reject donor recommendations regarding investments or distributions. In the event of unsatisfactory service, many administering organizations allow donors to transfer the account elsewhere.
  • Limitations: DAFs can only make distributions to 501(c)(3) public charities. Distributions cannot be made to individuals.
  • Compensation: While other investment and philanthropic techniques can establish salaried management, DAFs cannot. All DAF funds must be transferred directly to a 501(c)(3) public charity, and salary payments are prohibited.

A DAF provides individuals with an easy way to support public charities of their choice. It provides compelling tax incentives at low cost without limiting growth opportunities.

DAFs are best suited to individuals who:

  • Are excited about philanthropy and want to take advantage of tax incentives unavailable to the traditional checkbook philanthropists
  • Are unwilling to pursue a private foundation due to cost, legal complexity or the increased administrative requirements
  • Are willing to relinquish legal control of DAF contributions in exchange for the ability to make investment and distribution recommendations
  • Do not require the ability to provide salary or management payments from the DAF

Individuals for whom a DAF does not seem appropriate due to differing goals may wish to consider other approaches including:

  • Checkbook Philanthropy
  • Private Foundations
  • Charitable Trusts

SEI Private Wealth Management is an umbrella name for various wealth services provided through SEI Investments Management Corporation, a registered investment advisor. Investing involves risk including possible loss of principal.

This presentation is provided by SIMC. The material included herein is based on the views of SIMC. Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. This presentation should not be relied upon by the reader as research or investment advice.

Neither SEI nor its affiliates provide tax advice. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein. You should seek advice based on your particular circumstances from an independent tax advisor. The information contained in this communication is not meant to substitute for a thorough estate planning and is not meant to be legal and/or estate advice. It is intended to provide you with a preliminary outline of your goals. Please consult your legal counsel for additional information. This is intended for educational purposes and not meant to be relied upon as investment advice.

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