Donor Advised Fund versus Charitable Remainder Trust

Donor Advised Funds

What is a Donor Advised Fund, aka DAF? A Donor Advised Fund is an account provided by 501(c)(3) setups allowing people to make contributions in the form of cryptocurrency, private business interests, life insurance, 401(K)s, and other assets in exchange for an expedited tax deduction for state or federal income tax accounting purposes.

A contribution to a DAF is an irrevocable commitment, allowing the account provider to invest the funds and make grants to other charities or those of your choosing. This account will enable you to sidestep capital gains taxes. Meanwhile, the funds in the account can multiply, allowing you to give more and claim tax deductions every time.

Establishing a DAF

Pick a DAF sponsoring organization to set up this charitable trust funding, make contributions, and claim maximum tax deduction. Different types of DAF sponsoring organizations include community- or regional-based foundations, nationwide non-profits, and cause-based non-profits. Spending on their size, you may enjoy varying investment options and grantmaking ranges. Additionally, employee DAFs (designed to pool company employee contributions into one account) and family DAFs (designed to pool family contributions into one account).

Once you transfer assets to a DAF, the sponsoring organization legally assumes control over the assets, investing them for tax growth. Still, you may give directions on the vesting of the funds and which IRS-qualified charity should receive grants. These could be churches, public charities, and private foundations operating to keep their mission. But you don’t have to disburse grants right away. The money can sit in the DAF account and grow till you are ready.

DAF funding

There are various ways to fund a DAF. You can contribute through cash, mutual funds, private business interests, stocks, etc. The resulting tax deduction depends on the form of donation.

• Cash donations allow you to claim deductions up to 60 percent of the donation’s adjusted gross income
• Appreciated assets allow deductions of up to 30% of the asset’s adjusted gross income

DAF cost and fees

However, you must also prepare to pay some fees to the account sponsoring organization for services provided. Generally, these fees can be broken down into administrative, investment, and miscellaneous fees.

• The sponsoring organization charges admin fees for contribution processing, grantmaking, and other account administration duties. The organization can set a minimum annual fee or a certain percentage of your DAF assets yearly.
• Investment fees cover services such as securities selection and the organization’s trading on your behalf. It could be a transaction fee per trade or a certain percentage of your DAF assets.
• Other fees include account opening, grant processing, and wire transfer fees.

Benefits of DAFs

DAFs are crucial estate planning tools, allowing people to claim tax deductions in exchange for donations. Cash contributions generate deductions of up to 60 % of their adjusted gross income (AGI), while appreciated assets allow you to claim up to 30% of their AGI. You can claim deductions the same year you contribute.

Feel free to set up these charitable trust funding when your earnings allow this tax benefit. Additionally, the funds in DAF accounts can multiply tax-free. Also, depending on how the contribution is structured or made, you might not experience any capital gains tax when transferring an appreciated asset.

Putting funds in a DAF allows professionals to manage your charitable assets for you at a lower cost than setting up and managing a private foundation. Plus, you’ll still be allowed a say in how the funds are vested and donated and can claim additional tax deductions every time. 

Moreover, assets moved to DAFs leave your estate permanently, meaning you won’t have to pay associated estate taxes.

Charitable Remainder Trust

A Charitable Remainder Trust, aka CRT, is another crucial estate planning tool that allows people to pursue their philanthropic agendas in exchange for certain financial benefits. However, this charitable trust funding operates differently from a DAF. It’s a split-interest vehicle, meaning one may reap income and tax deductions from their contributions.

Establishing a CRT

To set up a charitable gift trust, discuss your philanthropic goals, financial situation, and overall estate plan with your estate attorney to determine which CRT is best for you. The two main types of CRT are Charitable Remainder Annuity Trusts and Charitable Remainder Unitrust, also known as CRAT and CRUT.

• CRATs pay fixed income to the grantor and their beneficiary until the former’s death, upon which the remaining funds are transferred to their pre-designated charity.
• On the other hand, CRUTs pay a variable annual income until the donor’s death, upon which the underlying assets go to pre-chosen charities. The annual income depends on the underlying asset’s fair market value.

Once you decide on the right CRT, you’ll need to draw up a trust deed outlining the trust’s intent, trustee name, responsibilities, distribution of assets, beneficiary designations, and the successor charity. You best work with an attorney to ensure the document meets the standards required by tax laws and your investment and philanthropic goals.

CRT funding

Contributing to a CRT is an irrevocable commitment, allowing the trustee to assume control over the management and vesting of the assets in line with the objectives outlined in the trust instrument. You can fund a CRT with any of the following types of assets:

• Cash
• Stocks
• Private business interests
• Real estate
• private company stock

In the case of non-asset contributions such as stocks, real estate, and business interests, valuation depends on the type of asset. For example, the value of stocks is their closing price at the contribution date, while real estate value is based on an appraisal performed by a qualified professional.

On the other hand, private business interests are valued based on their financial statements, industry performance, and other techniques. Of course, one of the reasons for determining the fair market value of the contribution to the CRT is for tax deduction claims. You want to keep abreast of your investment from the start.

Costs and fees associated with CRT

Of course, CRTs come with their share of initial setup costs and overhead expenses. In any case, it depends on the nature of the trusts, the assets they hold, and the trustee’s temperament.

• Initial costs. These include expenses such as attorney fees, appraisal fees, trustee initial fees (one-time setup fees typically charged by corporate trustees)
• Overhead costs. These include the trustee’s annual fees, investment manager fees, tax expert fees, recordkeeping fees, etc.

Benefits of CRT

The number one advantage of CRT is the income it generates for non-chartable beneficiaries for a certain period, usually 20 years or throughout the life of at least one of these noncharitable beneficiaries. These could be the settlor, their spouse, children, etc. They could be allocated monthly, quarterly, semiannual, or annual payments during the timeframe. Afterward, the remainder of the trust is passed to designated charitable beneficiaries.

The transfer of assets to CRTs is an irrevocable commitment, removing one’s name from the legal title of the assets and thus sidestepping estate taxes. You won’t have to pay capital gains taxes on assets in the trust. Moreover, these assets are kept safe from the hands of creditors you may owe debts. CRTs help reduce the estate tax burden for you and your beneficiaries.

Additionally, you can claim a partial tax deduction when you transfer assets. However, the allowable deduction is smaller than what DAFs allow. The extent of your tax deduction claim will depend on the type of CRT and its terms, the net present value of payments to charitable beneficiaries at life expectancy, and IRS interest rates as dictated by expectations regarding the performance of the assets in the trust.

Which is better between DAF and CRT?

The choice between DAF and CRT depends on the gains you desire, the level of control you want to maintain over your donation and the associated fees and expenses you are willing to shoulder.

CRTs allow you and your noncharitable beneficiaries some income (variable or fixed) for a specific time frame, after which the remainder of the trust goes to pre-designated charitable beneficiaries. It’s the best vehicle for donors who want to transfer significant appreciated assets in exchange for a guaranteed lifetime income stream and the chance to support a charity of choice with a more significant eventual gift. You won’t incur any capital gains tax or estate taxes on the assets, and you may claim an immediate tax deduction for your donations.

On the other hand, DAFs do not generate income for contributions. You only benefit from voided capital gains taxes and allowable deductions due to your contributions. In this case, too, you can move to claim the tax deductions the same year you make the contributions. Moreover, DAFs allow users to claim more significant tax deductions than CRTs.

Regarding flexibility, DAFs allow you a say in how your contributions are invested and how the resulting income should be gifted. On the other hand, once you set up the trust deed, you won’t have much control over the management and administration of your contributions.

It’s best to work with an attorney to ensure your instructions make sense for your philanthropic motives and investment goals (if any). A qualified attorney can help set up your charitable gift trust and join the millions of Americans who are already leveraging these gifting vehicles to maximize their tax benefits.

If you’ve decided about these types of charitable trust funding, we’d be happy to talk to you about our services as trust and estate attorneys in California. Schedule a free consultation on our website today.