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Not long ago, I was working with a family who had an eye on giving back to the community and the world. They wondered whether they were doing so in the most efficient way possible and whether there were better options.
The family matriarch had set up a charitable remainder trust that designated two specific organizations to receive the money upon her death.
The family members questioned whether this was the best approach. What if one or both of the organizations no longer existed when she passed away? What if one of the organizations changed its mission so that it no longer matched the family’s beliefs or leanings?
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Would they want this money to go to a charity that may have strayed from its original purpose?
As we talked about their concerns, I suggested they think about establishing a donor-advised fund (DAF), a tool that could alleviate their apprehensions while giving them more control over when, how and to whom they make their donations.
An additional advantage was that a DAF could be made a beneficiary of the existing charitable remainder trust (CRT). That way, the fund would provide added flexibility while the family’s trust stayed in place.
The family members were unfamiliar with DAFs, as you may also be. But for those who want to donate to their favorite causes while maintaining some control over how the money is handed out, this type of fund can make a lot of sense.
Spreading out donations
Here’s how DAFs work: You establish an account in the name of one or more donors, and that account is held in custody by a nonprofit organization, which is considered the sponsoring organization.
You then make tax-deductible contributions to the account. Even though you can claim a contribution as a charitable tax deduction when you contribute to the account, you don’t have to distribute the money to a charity all at once.
The money can grow tax-free for years, and you can make multiple donations over time and even spread the money out among several charities.
In other words, you can contribute to the fund whenever you like. You can also distribute money to causes when needed or when it simply makes the most sense.
That way, if a particular charity dissolves or its mission evolves — which were among the concerns of the family I was working with — you can adapt your giving plans as needed.
DAFs have grown in popularity. In 2023, the funds made a total of $54.8 billion in grants to charities, according to the National Philanthropic Trust’s 2024 DAF Report. Although that figure was slightly down from 2022, it was nearly double the amount awarded as recently as 2019, when $28.5 billion in grants were distributed.
How much can and should you contribute to establish a DAF?
That varies quite a bit depending on the sponsoring organization. Some organizations require no minimum amount at all, while others require at least $10,000, $25,000 or more.
A long-lasting legacy
The family I was working with appreciated the opportunity to make grants to charities on a more flexible basis. If, as time passed, other organizations they liked came to their attention, they could simply direct grants to those groups.
By making a DAF a beneficiary of their charitable trust, they could help more causes, have a longer-lasting legacy and allow more family members to participate in the giving.
If you’re interested in creating a legacy through charitable giving, consider a DAF to achieve your goals. And if you already have a CRT in place, think about adding a DAF as a beneficiary.
A financial professional can help you understand how this and other charitable-giving options work, so you land on an approach that works best for you.
Leaving a legacy through philanthropy is rewarding for everyone involved.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
