Is A Donor Advised Fund Right For Your Family Office?

When you hear the name John D. Rockefeller, an image of the first billionaire may come to mind, but I’m not here to talk about that John D. Rockefeller Sr. I’d like to discuss his son and only heir the immense fortune he accumulated, John D. Rockefeller Jr. John spent much of his life dedicated to philanthropy. He graduated from Brown University and then went to work for his father. He didn’t have any specific responsibilities, but there was an expectation that he would be doing business and philanthropic work. John quickly found that he didn’t have the same knack for making profit that his father did though and after a nervous breakdown left his job and decided to dedicate his life to charitable giving.[1]

It’s John Jr. that we have to thank for one of the key charitable vehicles utilized by family offices today, the Donor Advised Fund (DAF). “The first DAF was established in 1931, by the New York Community Trust and supported and sustained by John D. Rockefeller Jr. to allow individual donors to support charitable causes they were passionate about as opposed to grant decisions being made by the community foundation”.[2]

So what exactly is a Donor Advised Fund? Donor Advised Funds are charitable vehicles that fall in between Public Charities and Private Foundations. The allow individuals to take advantage of charitable tax deductions up front while controlling the timing of when their assets are given. It’s not as complicated as it sounds. The giving vehicle could be utilized by a donor when they have a spike in income that puts them into a higher tax bracket than they anticipate being having the future. A good example of this would be someone selling their company. If they know that they would like to commit a certain amount of money to a charity in the future, but aren’t quite ready to give it yet, they can put the money in a donor advised fund. When that happens, the donor then loses ownership of the money, however they are able to advise when the money is donated and to which organizations funds to will benefit. Since the donor gives up control of the money, they receive a tax deduction in the current year even though he or she may not decide who they want to ultimately end up with the funds.[3]  

The fact that a donor can now separate the timing of the gift from the year the tax deduction is received opens up a lot of flexibility for tax strategies. Additionally, certain basis rules that apply regarding the donations of non cash to private assets do private foundations don’t apply to donor advised funds. Alan Cantor, who is a nonprofit consultant provides us with the following example to illustrate why a donor advised fund be much more beneficial in comparison to private foundations:

“Let’s imagine that you’re a donor and you bought a house on Lake Tahoe in 1962 for $100,000. It’s now worth $5 million dollars. And you want to create a charitable entity that you can make charitable gifts from. If you put that into a private foundation, the only tax deduction you would get would be that $100,000 that you bought the house for 50 years ago. If you put it into a donor advised fund, you would get a $5,000,000 deduction because technically it is considered part of a public charity that technically controls the donor advised fund.”[4]

[1] https://www.philanthropyroundtable.org/almanac/people/hall-of-fame/detail/john-rockefeller-jr

[2] https://thesignatry.com/daf-history/

[3] https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html

[4] https://www.youtube.com/watch?v=nfW_qCmOavg