If you have accumulated a significant amount of wealth, you can rest assured you will be financially secure for the rest of your life. Hopefully, this will also mean your loved ones and family will be taken care of as well once you have passed away and leave them with an inheritance. On the other hand, being blessed with a large amount of wealth, many people feel the urge to contribute to making the world a better place for everybody through charitable giving.
Donor-advised funds can offer you many advantages when looking to donate to charitable causes. However, there are also some disadvantages you should know about before deciding to utilize a donor-advised fund for charitable giving.
What is a donor-advised fund?
Donor-advised funds (DAFs) are funds created to make large charitable donations. These funds are operated by a third-party which manages and facilitates donations to charitable causes from individuals, families, or organizations.
How do DAFs work?
Cash, various securities, and other assets are donated to a DAF which is a 501(c)(3) organization. Contributions are held in the DAF account under the name of the donor. Eventually the fund manager will give the donated assets to the charity chosen by the donor.
As a donor you will be able to take a deduction on your taxes for your donation despite the fact the funds have not been given to the charity yet. This allows you to make the donations if you need a tax deduction right away while giving you the flexibility to decide where to donate the assets at a later time.
Although there are many advantages of using a DAF for your charitable giving, there are criticisms of DAFs which you may want to educate yourself about. The following are some benefits and disadvantages of DAFs.
Disadvantages of DAFs
One serious drawback of DAFs is a DAF is not legally required to distribute the funds received and can hold the assets for as long as the fund chooses to do so. Despite the fund sponsor promising you as the donor you will retain control over the assets donated, the fund ultimately decides what is done with the assets held.
There have been instances where a DAF ends up going bankrupt for mismanagement or some other reason, leaving no funds left to be donated to the intended charities. Other DAFs end up spending donated funds on generous bonuses to employees and to pay for legal fees from lawsuits from other disgruntled donors. Also, DAFs commonly have multiple hidden fees.
Advantages of DAFs
The biggest advantage of a DAF is being able to obtain a tax deduction for your donation while also providing you the time and flexibility to make a decision on which charitable cause to donate to at a later date. Also, the donated assets and funds can appreciate tax-free through fund investments until you make your final decision on where to donate.
Should you use a DAF?
Whether or not a DAF is the right decision for you can be a complicated question. Not everybody is in the same financial situation and with the same values. Contact us today to consult with a financial professional who can help you clearly see what options you may have available to you.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.
To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and investors may incur a profit or a loss. Past performance does not guarantee future results.