Donor Advised Funds

Lesson

Donor-advised funds are a popular and flexible way for individuals to make charitable contributions. We will discuss the benefits and drawbacks of using donor-advised funds, tax implications, and estate planning considerations.

Practice Question #1

Which of the following is a benefit of using a donor advised fund for charitable giving?

A) Immediate tax deduction

B) No payout requirement

C) Tax-free growth

D) All of the above

Select an option above to see an explanation here.

A) Donors receive an immediate tax deduction for contributions to a donor-advised fund. B) Unlike private foundations, donor-advised funds do not have a payout requirement. C) Assets in a donor-advised fund grow tax-free. D) All of the above benefits apply to donor-advised funds.

Terms

Donor-advised fund (DAF):: A charitable giving vehicle administered by a public charity, which allows donors to make contributions and recommend grants to qualified nonprofit organizations.
Grant:: A financial award given by a donor-advised fund to a qualified nonprofit organization based on the donor's recommendation.
Public charity:: A nonprofit organization that receives significant support from the general public and is eligible for tax-deductible contributions.
Private foundation:: A nonprofit organization primarily funded by an individual, family, or corporation and subject to more stringent regulations than public charities.
Charitable deduction:: A tax deduction for contributions made to qualified nonprofit organizations, which reduces the donor's taxable income.

Practice Question #2

What is the primary difference between a public charity and a private foundation?

A) Public charities receive a significant portion of their support from the general public, while private foundations are primarily funded by an individual, family, or corporation.

B) Public charities are subject to more stringent regulations than private foundations.

C) Private foundations can receive tax-deductible contributions, while public charities cannot.

D) Public charities are required to distribute a minimum amount each year for charitable purposes, while private foundations are not.

Select an option above to see an explanation here.

A) This is the primary difference between public charities and private foundations. B) Private foundations are subject to more stringent regulations than public charities. C) Both public charities and private foundations can receive tax-deductible contributions. D) Private foundations, not public charities, must distribute a minimum amount each year for charitable purposes.

Do Not Confuse With

Charitable remainder trust:: A trust that provides income to the donor or other beneficiaries for a specified period, with the remaining assets going to a qualified charity.

Practice Question #3

Which of the following is NOT a feature of a donor advised fund?

A) The donor can recommend grants to qualified nonprofit organizations.

B) The donor receives an immediate tax deduction for contributions.

C) The donor can appoint a successor advisor to manage the fund after their death.

D) The donor is required to distribute a minimum amount each year for charitable purposes.

Select an option above to see an explanation here.

A) This is a feature of donor-advised funds. B) This is a feature of donor-advised funds. C) This is a feature of donor-advised funds. D) This requirement applies to private foundations, not donor-advised funds.

Historical Example

In the early 1990s, a wealthy individual established a donor-advised fund account with a $10 million contribution. Over the next two decades, the fund's assets grew tax-free, and the donor recommended grants totaling more than $20 million to various nonprofit organizations.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A couple in their 60s, passionate about supporting environmental causes, established a donor-advised fund with an initial contribution of $100,000. They receive an immediate tax deduction for their contribution, and the fund's assets grow tax-free. Over the next several years, they recommend grants to various environmental nonprofits, and they also appoint their adult children as successor advisors to continue their philanthropic legacy after their deaths.