As you contemplate your estate planning and leaving a legacy, you may want to recognize and give to some charitable organizations or philanthropic causes that have made an impact on you in your life. You may want to make sure that your wishes continue after you’ve passed away. Maybe you want to encourage the beneficiaries of your estate to continue the legacy of charitable giving that you have maintained during your lifetime. If so, you’ll likely want to do that in a way that is accessible, simple, and effective.
There are several options available to accomplish your charitable giving goals in your estate plan. You could name specific charities as beneficiaries, create a private foundation or supporting organization, or establish a charitable remainder trust or charitable lead trust, to mention a few. This article focuses on an additional option to include your passion for charitable giving in your estate plan: naming a donor advised fund (DAF) sponsor as a beneficiary of your estate to achieve your charitable goals.
What is a donor advised fund?
A DAF is a dedicated charitable fund maintained by a public charity (a "sponsored organization") that is exclusively dedicated to charitable giving. When you contribute to a donor advised fund during your lifetime, you are eligible for an immediate income tax deduction. When your estate makes a contribution to a DAF at your death, there may be estate or inheritance tax benefits, in addition to income tax benefits.
Funding a donor advised fund through your estate can open up an array of charitable giving opportunities for benefiting your favorite charities, and can also provide your loved ones with the opportunity to begin to recommend grants to any IRS-qualified public charity that they want to support.
Lou Marchi, regional vice president at Fidelity Charitable® explains, "Much like private foundations, DAFs provide many benefits for organizing and planning charitable giving, including simplified recordkeeping and a variety of investment options to grow the funds in the DAF until you are ready to recommend grants be made to other public charities."
Flexibility in updating your estate planning documents
A DAF can be an important tool to use as part of the estate planning process. Instead of naming specific individual charities as beneficiaries in your estate planning documents, you could name a specific DAF account as the charitable beneficiary under your will, trust, annuity, insurance contract, or retirement plan or investment account. A DAF may receive a specific dollar amount, a percentage, or the remainder after other distributions. To help put your wishes to work, consider naming charitable recipients along with a specific grant schedule on your DAF account, or delegating the grant recommendation privileges to another person (such as children or sibling). Either of these approaches can help eliminate a roadblock to completing an estate plan.
"Individuals sometimes delay the signing of their estate planning documents because they want to leave assets to charity, but are not sure exactly which charities to support at the time. They can be fearful that their giving priorities might change over time," said Pamela Pirone-Benson, vice president on Fidelity's Advanced Planning team.
"Using a DAF in an estate plan is a way to ease a client's concerns about which charitable cause to support while moving forward with completing an estate plan," Pirone-Benson continued.
This approach can provide flexibility to adjust giving priorities without some of the typical costs and inconvenience associated with modifying estate planning documents or creating other charitable giving vehicles such as private foundations or supporting organizations. Pirone-Benson provides this example: "If you’ve named 3 charities as beneficiaries in your will or trust, then decide 6 months later that you would like to add 2 additional charities, you’ll have to contact your estate planning attorney to revise that document."
She continued, "Naming a public charity with a DAF instead of those specific charities, can give you the flexibility to change your mind on your giving priorities. For example, instead of incurring attorney’s fees for revising your estate plan, you could simply change the charities and/or their allocated percentages as the DAF succession plan." All you would need to do when you wish to make a change is to inform the DAF sponsor which you can usually do with a few clicks online. Your DAF succession plan determines your charitable legacy—how you want the funds distributed to charity or which individuals you choose to carry out the legacy of your DAF, by recommending grants to their favorite charities.
Understanding the tax benefits of charitable giving
Under current federal law, an individual will owe federal estate tax on their estate if it is worth more than $12.92 million in 2023. In addition, some states have their own estate or inheritance tax. In general, under federal law there is an unlimited deduction for assets that are distributed to qualified charities, making contributions to a DAF a powerful tool for reducing these taxes.
"Individuals have the ability to name specific charities as beneficiaries in their revocable trust or will and those charities certainly would welcome the distribution. However, it may be more tax-efficient to leave retirement assets to charity and to leave non-retirement assets to loved ones," suggested Pirone-Benson.
The reason is that not all assets are treated equally when inherited by individual beneficiaries and charities. For example, retirement assets (Roth accounts being the exception) are typically less advantageous to leave to individual beneficiaries because they will be subject to income tax when distributed. With the SECURE Act in effect as of January 1, 2020, many beneficiaries now face an increased income tax burden, as they may be required to deplete an inherited IRA within 10 years. Public charities would not be subject to this income taxation, so it's important to carefully select which assets to use for charitable distributions to enhance the benefits to all involved.
Efficiency in settling your estate
Identifying a DAF account as a beneficiary can also increase the efficiency of settling a trust or estate because the trustee or executor has clear instructions on how to distribute certain assets in accordance with your wishes. It is much simpler for the trustee or executor to make a single distribution to a DAF than to coordinate distributions to multiple charities. This process is further complicated for the trustee or executor when the distribution involves charities as beneficiaries of a retirement plan, insurance, or annuity contract, or an investment account which may require investment decisions or liquidation instructions and costs.
Marchi illustrated this complexity: "Let's consider a client that names 5 charities as the beneficiaries of your IRA. Then your trustee or executor would have to contact each of those charities and ask them to contact the IRA custodian to follow their process for distribution of the IRA. Each charity would likely have to complete paperwork to create a new account at the IRA custodian to transfer their proportionate share of each of the investments, then provide the IRA custodian with a direction to liquidate those assets and then send the charity a check, net of any fees associated with the process. If the DAF is the beneficiary, the whole process is not only easier for the trustee or executor, but also for the charity, because the administrative burden shifts to the DAF."
Legacy planning for the next generation
A DAF can also be used to effectively pass the gift of philanthropy on to the next generation. For example, you can name individuals as the succession grant advisor for your DAF with shared advising responsibilities, potentially becoming a reason that siblings, children, grandchildren stay close as they pursue a shared mission together. Using a DAF in this way can encourage family philanthropy in much the same way as a private family foundation, but with similar tax benefits and potentially lower legal and accounting costs. You also could give a child or grandchild the ability to recommend a grant from the DAF to a charity of their choosing and discuss this with them, as an opportunity to share your views on philanthropy with them.
"If you have named your daughter as your successor (one who will use the DAF after your passing), she could continue to use the DAF to recommend grants from the DAF to support the causes and organizations that she is passionate about. She won’t have any administrative headaches maintaining the DAF, since there is no tax reporting required, and she can continue to contribute to the DAF, qualifying for similar tax benefits," Marchi pointed out. Speak with your attorney regarding how to ensure that your charitable intent in this regard is reflected in your estate plan.
Lastly, using a DAF allows a donor to have an ongoing impact through endowed giving. More than simply distributing outright to charities as the succession plan for your DAF, Fidelity Charitable® has the Endowed Giving Program to let you set up recurring grants to up to 6 charities for a minimum of 5 years. This allows a Giving Account to remain open potentially long after your death to distribute funds to those charities in the name of your DAF.
Working with Fidelity Charitable®
Fidelity Charitable® is the largest DAF sponsor in the US and makes it simple to open and use a DAF account, known as a Giving Account®, used exclusively for recommending grants to public charities.
Since 1991, Fidelity Charitable has been helping donors explore the different charitable vehicles available and explaining how clients can potentially complement and enhance giving strategies through a Giving Account®. In addition to donating cash or long-term appreciated securities to Fidelity Charitable®, it may also be possible to donate non-publicly traded assets, such as privately-held C- and S-corporation stock, restricted or "control person" shares in a public company, cryptocurrency, limited partnerships, or LLC interests.
Next steps to consider
Now may be a good time to consult an estate planning attorney to establish or revise your estate plan. You can begin this process by contacting a Fidelity professional who can help you get informed, organized, and connected to an attorney so you can plan for your wishes, now and for tomorrow.