DAF Dos and Don’ts

Once you’ve established a donor-advised fund (DAF), you’ll want to keep a few rules in mind as you think about how best to use it. To help introduce you to some of those rules, we’ve compiled this short list of DAF dos and don’ts. By following these tips, you can become the best charitable giver you can be while avoiding trouble come tax time.

Do: Give strategically

The end of the year is not always the best time to think through your charitable-giving options. Between all the family gatherings, holiday meals, and well-deserved naps that dominate December, it can be hard to properly research and evaluate charities before New Year’s Eve has come and gone.

A donor-advised fund at CFSEK gives you more time to investigate and select which charities to benefit. Because the Community Foundation is itself a public charity, you can deduct your contributions to your CFSEK DAF in the year you make them. Then, you can do your homework and recommend grants from your DAF over time. You don’t get a second deduction when you make grants from your DAF, but you do get the opportunity to plan your giving more strategically.

Don’t: Give to individuals

Donor-advised funds are a great tool for helping other people, but they have their limits. Specifically, they aren’t allowed to make grants to individuals. In fact, federal law imposes hefty excise taxes on DAFs that do. Among other things, that means you can’t use your donor-advised fund to award scholarships.

What to do instead: If you want to provide scholarships for students, we can help you establish a scholarship fund. And you can even review scholarship applications and help choose scholarship recipients as part of a selection committee.

Do: Create a legacy

Customization is the name of the game with donor-advised funds. When you establish a DAF at CFSEK, you get to name it, recommend how fund assets will be invested, and tell us what we should do with your DAF when you pass away. Then, once it’s established, you have flexibility in recommending grants from your DAF. In short, your donor-advised fund can reflect your personality and values, becoming a part of your legacy in the community.

For example: One of our earliest donor-advised funds was established by James and Eleanora Belew. When they passed away, we converted their DAF into an unrestricted fund to be used for granting, as they had requested. The money in that fund helps CFSEK support charitable projects addressing basic human needs through our General Funds grant cycle.

Or how about continuing a legacy? In the video below, CFSEK founder and former trustee Vicki Dennett describes how she uses a donor-advised fund to carry on her parents’ legacy of charitable giving.

Don’t: Use your DAF for personal benefit

Several sections of the Internal Revenue Code impose excise taxes on DAF grants that provide a benefit to a donor-advisor or certain related parties. Because of these provisions, you should not use your donor-advised fund to, among other things:

  • Fulfill a pledge;
  • Pay part or all of the cost of a ticket to a charitable event; or
  • Pay part or all of a membership fee charged by a charity.

What to do instead: Pay for the types of charitable gifts that involve a personal benefit to you with your own money. Use your DAF to provide grants to charities in other circumstances.

Do: Bunch donations to your DAF

With the standard deduction higher than it’s ever been, deducting charitable contributions has become harder than ever. One creative solution to that problem is making two or more years’ worth of donations in a single year. We call that solution “bunching” donations. You can read more about how bunching works in our year-end giving guide.

For example: Douglas Stuckey has been involved with CFSEK for more than a decade. He’s been a board member and officer (even serving as president in the past), and he’s helped to establish several charitable funds. In the video below, Douglas explains how he bunches donations to save on his taxes every other year.

Don’t: Fund your DAF with an IRA

One great giving strategy for people 72 or older with IRAs is to make a qualified charitable distribution (or QCD). A QCD is a distribution from your IRA directly to a public charity. QCDs offset your required minimum distribution (up to $100,000) and can be excluded from your taxable income for the year. But distributions to a DAF don’t count as QCDs.

What to do instead: If you have to withdraw money from your IRA as a required minimum distribution, you still have options for making a QCD to the Community Foundation. We offer several different types of charitable funds beyond donor-advised funds. So, for instance, you could make a QCD to one of our agency funds or to a scholarship fund. You could even use your QCD to establish a new fund (other than a DAF, of course)!

Do: Learn more about DAFs!

Donor-advised funds are a powerful tool to establish your legacy and make a difference in your community. By following the tips outlined above, you’ll be well on your way to making the most of your DAF.

If you’d like to learn more about establishing a donor-advised fund at CFSEK, you can contact us through our website. We look forward to hearing from you!