“Many charitably inclined wealthy families believe they must establish a private foundation to be able to make a philanthropic impact,” he said. “DAFs are an excellent and less-costly alternative. There are no professional fees to incorporate or form a trust and prepare documents [and] no mandatory 5% annual distribution requirement that’s associated with private foundations. Forming a DAF simply requires selecting a name, filling out an application and funding an account.”
“It’s always been easier to teach clients about DAFs when they have a large liquidity event,” Foss added. “Explaining the advantage of the DAF when you’re just trying to bunch deductions is harder, but after a couple of years [now] of higher standard deductions, it’s becoming clear.” Other advantages include a DAF’s potential use as a repository for a private foundation.
DAFs cannot be used to make qualified charitable distributions from retirement funds and they can’t be used for the Coronavirus Aid, Relief, and Economic Security (CARES) Act contributions for taxpayers who don’t itemize.