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Using Donor Advised Funds in Your Estate Plan

Donor-advised funds (DAFs) are usually free and easy to establish and can be used a variety of beneficial ways in your estate plan. A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations that you care about. When you contribute cash, securities or other assets to a DAF at a public charity, you are generally eligible to take an immediate tax deduction, although they can also be used in testamentary (after death) planning. Most DAF accounts at the big brokerage and online mutual fund companies qualify as public charities.

There are a few problems about naming a charity directly in your will or trust that can be mitigated by using a DAF. Suppose, for example, that you name different charities receiving different percentages in your will or trust. If you ever want to add a charity, delete a charity, or change the percentage bequest, you must create a codicil to your will or amend your trust. Testamentary documents must be signed in accordance with state law, which generally requires you to use an attorney in order to assume that you’ve accomplished your change correctly.

If instead you name a DAF, you need only change the charities and percentages inside of the DAF, which now can usually be accomplished online. Assume, for example, that Sam Houston establishes a DAF at a large online mutual fund company. The charities he wishes his DAF to benefit include his university, church, and a local environmental organization. He instructs his attorney to name “Sam Houston Charitable DAF” as a beneficiary of his trust. If he later wants to add The American Heart Association to his DAF, he does not need to amend his trust. Instead, he logs onto his DAF online, adding it and adjusting all the percentages of the other charities so that they add up to 100%.

Many clients have larger qualified retirement account balances, such as in traditional IRA and 401(k) accounts. If you name an individual or trust that benefits an individual as the beneficiary, income tax will be due on the distribution from the Inherited IRA. Instead, if you name a charity, there will be no income tax due. Somewhat problematic, however, is that several IRA custodians increasingly require the charity to establish an account with that custodian before transferring the bequest. This isn’t a problem for large charities like the American Heart Association but can be quite the strain on your local church who may not have staff to complete the paperwork.

Rather than naming the charities as direct beneficiaries of your IRA account, you can establish a DAF and name it. The DAF then makes distribution to the charities without the requirement for additional paperwork.

There are some things to know about DAFs. They are not a private foundation, which is a separate legal entity. Private foundations must go through a rigorous process to obtain an tax exemption letter from the IRS, and are subject to more stringent tax laws and regulations, including tax filings and recordkeeping requirements.

DAFs are part of a larger charitable organization established by a custodian broker or by a charity itself. This means less record keeping on your (or your estate’s) part. As such, however, there’s a governing body which must approve charitable distributions you recommend. Before establishing the DAF, you’ll therefore want to investigate with the supporting organization whether your charities are or will be approved, especially if they are a bit out of the ordinary.

If your DAF will largely be a testamentary transfer device, you’ll want to nominate individual(s) of your choosing to be your successor. You’ll want to ensure that any successor that you name will carry out your wishes rather than change the beneficiaries. Generally, many DAFs allow you to log in and name and/or change your successor.

The grants your DAF bestows can be public or can be anonymous. Further, your DAF may ask the supporting organization to attach a specific purpose to your grants, which would be relayed to the charity. You cannot, however, legally bind pledges with a DAF. You may also make grant recommendations “in honor of” or “in memory of.”

If a Donor Advised Fund interests you, talk to your estate planning attorney about the most advantageous way to incorporate it into your estate plan.

©2022 Craig R. Hersch, Sheppard Law Firm Learn more at www.floridaestateplanning.com

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