Philanthropy Made Easy: 3 Essential Donor Advised Fund Rules
A donor advised fund is one of many types of giving vehicles you can establish at Greater Houston Community Foundation. Field of interest funds, designated funds, unrestricted funds, and scholarship funds are also popular and can make a big difference in the community while also fulfilling your goals for tax and charitable planning.
Imagine being able to support your favorite charities and causes with ease, while also enjoying significant tax benefits. That’s the power of donor advised funds (DAFs). DAFs are simple and flexible ways to give to charity, allowing you to make a tax-deductible contribution of assets including cash, publicly traded stocks, bonds, other securities, business interests, life insurance policies, real estate, and many other appreciated assets. With your DAF, you can then recommend grants to your favorite charities, helping them meet pressing community needs as they arise.
Your gifts to your donor advised fund are tax deductible transfers to the Community Foundation, which is a charitable organization recognized under Internal Revenue Code Section 501(c)(3). Greater Houston Community Foundation follows the Internal Revenue Service’s requirements that disbursements from your DAF meet certain important qualifications to preserve that charitable tax status for everyone’s benefit. It is always advisable to consult with a qualified tax professional who can offer personalized guidance tailored to your specific circumstances and objectives.
Continue reading: What is a donor advised fund?
What are the rules for donor advised funds? Three crucial tips:
Donor advised fund rule 1: Personal pledges and charitable organizations
DON’T: Use your donor advised fund to satisfy a personal pledge to a charitable organization, such as to a capital campaign.
DO: Develop a strategy with one of the Community Foundation’s philanthropic advisors so you can achieve your intentions to support your favorite organization’s fundraising goals.
Donor advised fund rule 2: DAFs and private foundations
DON’T: Use your donor advised fund to support a private family foundation. Donor advised funds at the Community Foundation fall under a different (and more favorable) set of IRS rules than private foundations.
DO: Reach out to our team of philanthropic advisors to learn how your DAF and private family foundation can work together to achieve your charitable goals. Some fundholders even decide to close their private foundation and consolidate their giving with the Community Foundation to achieve greater impact, save on expenses, and achieve better tax results.
Continue reading: What is a private foundation?
Donor advised fund rule 3: DAF restrictions on private benefits
DON’T: Use your donor advised fund to buy tickets to fundraising events, such as galas and golf tournaments, where the cost of the ticket is not fully tax deductible (also known as a bifurcated gift).
The reason for this is that the IRS views the taxpayer as receiving benefits from the event (food, drinks, swag), and this “private benefit” muddies the waters of tax deductibility. These donor advised fund restrictions require vigilance: even if a portion of the ticket is deductible according to the charity, it’s still not a permissible distribution from a donor advised fund.
DO: Reach out to the Community Foundation if you’re asked to sponsor a fundraiser. We are happy to discuss solutions to achieve both your charitable goals and goals for getting involved with the event.
Continue reading about the changes in bifurcated gifts
Always be aware of donor advised fund tax deduction limits
Are donor advised funds 100% deductible? While donor advised funds offer significant tax advantages, all contributions are subject to IRS deduction limits based on your adjusted gross income (AGI). These limits vary depending on the type of asset you contribute and can impact your tax planning strategy.
- Cash contributions to your DAF account are generally deductible up to 60% of your AGI in the year you make the gift.
- Appreciated securities and other non-cash assets typically have lower deduction limits, usually capped at 30% of your AGI. Donating appreciated assets can, however, provide additional tax benefits that often make it a smart financial decision.
If your charitable contributions exceed these annual limits, don’t worry—the IRS allows you to carry forward excess deductions for up to five additional tax years. This carryforward provision means you can still benefit from larger gifts even if they exceed the current year’s deduction limits.
The Community Foundation’s philanthropic advisors can help you develop a multi-year giving strategy that maximizes these charitable giving tax deductions while ensuring your charitable goals are met. We work closely with your tax professionals to time contributions strategically, potentially allowing you to optimize deductions across multiple tax years.
Your philanthropic partner
Whether you’re a financial advisor looking to partner on your high-net-worth client’s philanthropic and estate planning, or you’re a philanthropist looking to establish a donor advised fund to enhance your giving strategy, engaging with the Community Foundation can be a powerful thing.
When you partner with the Community Foundation, you’re gaining a trusted ally in your philanthropic journey. Our team of knowledgeable philanthropic advisors provide personalized guidance and support, leveraging their extensive network and expertise to help you achieve your charitable goals.
Ready to start your journey? Call us at 713-333-2210 or reach out directly to learn more about how we can help you achieve your philanthropic vision.
More Helpful Articles by Greater Houston Community Foundation:
- Why Donating Appreciated Stock Makes Financial Sense
- How the Step-Up in Basis Can Maximize Your Charitable Giving
- How to Create an Endowment Fund
- How To Preserve Generational Wealth
- How to Donate Shares of Privately Held Companies
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