By Christine Abrams and John Butler
A Donor Advised Fund (DAF) may allow your church members or faithful supporters to make tax deductible gifts before they are sure of where it should be used. Are you familiar with the benefits potentially offered by a Donor Advised Fund to members or attendees of your church or congregation?
Pastors, church treasurers, stewardship directors, missions directors and especially donors should know about DAFs. A DAF may provide some donors a valuable alternative to direct giving. The options a DAF offers, such as less administrative work for donors and churches and tax benefits, can naturally translate to greater giving levels.
A DAF is an account which allows the donor to make a contribution and then later advise the sponsoring organization on an ongoing basis long after contributions to the fund are made. The donor may advise as to which organizations amounts in the fund are distributed to and how monies in the fund are invested.
The DAF sponsor is itself a charitable non-profit organization, so a donor receives an immediate tax deduction when contributions are made to the DAF even though distributions may be spread over many years. The balance in a DAF grows tax-free. Distributions are made from the DAF to any other tax exempt non-profit organization, including your church. Basically, nearly any organization the donor could have made a tax deductible contribution to directly, can receive a distribution from a DAF.
Why would a donor want to use a DAF instead of making donations directly to the church or other charitable organization? Here are two examples of the usefulness of a DAF. The first demonstrates what a DAF can accomplish for a donor and the second shows how a church might benefit by opening a DAF.
Advantage for donors
James and Lydia Smith own a successful small business. Their two sons, Jason and Matt, are 11 and 13. The Smiths are not wealthy but comfortable. The couple regularly gives to their church and to many other ministries.
The couple wishes they could avoid some of the tax-related chores that come with charitable giving. Their chief complaints are:
- The hassle of tracking down receipts for every donation
- Whenever they give to a new charity, having to verify the organization is “qualified” by the IRS
- The year-end rush to decide how much to give and to whom
- They wish they could give anonymously but because they need a receipt for tax reporting that is impossible.
Setting up a DAF offered several opportunities to the Smiths. All gifts now go to the DAF — they now receive only one receipt. The DAF verifies that all charities are “qualified.” December gifts all go to the DAF and distributions are decided in no rush in early January. The DAF allows the couple to give anonymously. Recipients receive checks from the DAF sponsor with no mention of the Smiths on them. Jason and Matt can contribute to the same DAF and they help their parents decide where distributions will be made to.
Advantage for churches
Victory Church’s staff had little excess capacity. So, management preferred contributions of cash or publicly traded stock. The church might consider accepting unusual non-cash items but knowing these would be a challenge to handle, value or dispose of properly, Victory never promoted them.
Because of its limitations, Victory was missing opportunities to receive non-traditional type gifts like land, business interests, restricted stocks, artwork and precious metals. However, these types of donations are highly attractive to donors because they avoid paying tax on the appreciation, by transferring the asset to charity (rather than selling and giving cash).
Victory investigated DAF sponsor options, and encourages its members to set up their own DAFs with a sponsoring organization. It now encourages members to give different types of non-cash gifts to their DAF. The DAF sponsor handles these donations, start to finish, providing a receipt to the donor. The donor then requests the DAF sponsor distribute cash to the church once the asset has been sold by the DAF sponsor.
Save precious time
This opened up opportunities to receive gifts that have appreciated in the donor’s hands. Bequests could be made to the DAF instead of directly to the church saving the church precious administrative time or the need to find expertise it did not have.
Generally it is not a good idea for a church to manage DAFs directly. Specialized skills are required for investing, administration and documentation. To protect donors from potentially large penalties, substantial tax and legal knowledge is required.
When selecting a sponsoring organization, a donor must make sure it will work for his or her needs. Most important, does its mission fit the types of organizations the donor wants to support? Other questions to ask include:
- What are the minimum amounts, if any (these may range from $1,000-$10,000)?
- What are the administrative fees and when they are assessed?
- What are the mandatory criteria for DAF distributions?
To educate your church staff and members about DAF opportunities you might consider a link to some general information in the giving area of your church Web site.
As you can see, a donor advised fund offers more options and flexibility than a direct gift. It can also enable the church to accept gifts beyond cash and stocks, without the worries of how to handle, value or dispose of them.
Christine Abrams is a tax manager and John Butler is tax counsel for Capin Crouse LLP, Indianapolis, IN. [capincrouse.com]
All about DAFs
Where can your church or church member find out more about DAFs? Many local community foundations and some larger ministries and educational institutions provide these services. The authors have worked with and recommend these organizations. All offer DAFs and are organized to serve the Christian community.
- Christian Ministries Foundation Inc.
- National Christian Charitable Foundation
- Waterstone (Christian Community Foundation)