Donor Advised Funds: Can They Hold Life Insurance?

Donor-advised funds (DAFs) are a popular way to give to charities. DAFs are like charitable investment accounts that support charitable organisations. Donors can contribute cash, securities, or other assets to a DAF at a public charity and are generally eligible for an immediate tax deduction. DAFs can be invested for tax-free growth, and grants can be recommended to any eligible IRS-qualified public charity. DAFs are flexible and efficient ways to organise charitable giving and can be part of an individual's estate plan. While DAFs offer several benefits, including tax advantages and the ability to donate non-cash assets, they have also been criticised for allowing donations to sit indefinitely and for benefiting wealthy individuals.

Donor-advised funds can be part of an estate

Donor-advised funds (DAFs) are a great way to continue your legacy of giving to charity even after your death. DAFs are flexible and efficient vehicles for charitable giving that can be used to support your favourite philanthropic causes or organisations. DAFs are also simple to set up and maintain, and can provide tax benefits to the donor.

Naming DAFs as Beneficiaries

You can name your DAF as a beneficiary in your will, trust, annuity, insurance contract, or retirement plan or investment account. DAFs can receive a specific dollar amount, a percentage, or the remainder of your estate after other distributions. This approach can provide flexibility to adjust giving priorities without the typical costs and inconvenience associated with modifying estate planning documents or creating other charitable giving vehicles.

Efficiency in Settling Your Estate

Identifying a DAF account as a beneficiary can 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.

Continuity for the Next Generation

DAFs can be used to effectively pass the gift of philanthropy to the next generation. You can name individuals as successor grant advisors for your DAF, allowing siblings, children, and grandchildren to pursue a shared mission together. This encourages family philanthropy in a similar way to a private family foundation but with similar tax benefits and potentially lower legal and accounting costs.

Providing Tax-Efficient Distribution of Assets

Under current federal law, an individual will owe federal estate tax on their estate if it is worth more than $13.61 million in 2024. However, 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. By leaving instructions with the DAF sponsor, you can support multiple charities with one bequest, and these gifts can also help reduce or eliminate the estate tax burden for your heirs.

They can be funded with non-cash assets

Donor-advised funds (DAFs) are a great way to give to charity while enjoying certain tax benefits. DAFs are flexible charitable investment accounts that allow you to support your favourite charities. They are simple to set up and offer immediate tax deductions on contributions.

DAFs can be funded with non-cash assets, which often provide more tax advantages than giving via cash or credit cards. These non-cash assets include publicly traded securities, mutual fund shares, private equity and hedge fund interests, certain complex assets (like privately held C corp and S corp shares), cash equivalents (such as checks, wire transfers, or cash from a brokerage account), and even cryptocurrencies like Bitcoin.

For example, if you donate appreciated securities directly to a charity instead of liquidating them and donating the proceeds, you can maximise your tax benefit and the overall amount available for charity. You become eligible for an income tax deduction of the full fair-market value of the asset, up to 30% of your adjusted gross income, and you can also eliminate or maximise capital gains tax on long-term appreciated assets held for more than a year.

Donating non-cash assets to a DAF is also simpler for the donor, as many charities find it challenging to accept these types of contributions. With a DAF, you can transfer stock directly from your brokerage account with just a click.

So, if you're looking to maximise your charitable giving and minimise your tax burden, consider funding a donor-advised fund with non-cash assets.

They can be named as a beneficiary in a will

A donor-advised fund (DAF) is a private account that manages and distributes charitable donations on behalf of an individual or family. DAFs are an excellent way to continue a legacy of generosity even after passing away. One way to do this is by naming your DAF as a beneficiary in your will.

There are multiple types of bequests that you could use to designate how your estate will be distributed. You could specify set dollar amounts to be contributed to a DAF when the estate is distributed. Alternatively, you could allocate a portion of the estate to be contributed to the fund. It is recommended that you discuss these options with your professional advisor to see how a DAF works best for the generosity you wish to leave as your legacy.

Naming a DAF as a beneficiary in your will makes it easier for your designated trustee to carry out your wishes. This also allows you the ability to effortlessly change and adjust how your assets are distributed after your death, especially if you want to give funds to multiple organizations.

You can also name your DAF as a beneficiary of your charitable remainder trust. Charitable remainder trusts (CRTs) are often used in estate planning, but they can be challenging because beneficiaries must be named when the trust is first established. If your wishes change later, it can be expensive to modify the CRT. One way to add flexibility is to name your DAF as the charitable beneficiary of the trust. In this case, the CRT must be distributed to one or more charitable organizations, but the donor and their family can modify the recommended beneficiaries. An added benefit is that, if the donor wishes, their financial advisor can manage the assets in the DAF.

They can be named as a beneficiary of a charitable remainder trust

A donor-advised fund (DAF) is a charitable investment account that holds your contributions until it is time to send them to your chosen nonprofits. DAFs are "donor-advised" because, in exchange for the donor's charitable gift to the sponsoring charity, they can recommend how their funds are invested and which charities will receive payments. DAFs are a good fit for those who want to involve their family in philanthropy, as donors can grant family members advisory privileges, fostering a legacy of giving that outlives the original donor.

A charitable remainder trust (CRT) is an irrevocable trust that can liquidate an asset to create income interest in a charitable lead trust or remainder interest in a CRT. CRTs are often used in estate planning but present a challenge: beneficiaries must be named when the trust is first established, and it can be expensive to modify the CRT later.

One way to add flexibility to a CRT is to name a DAF as the charitable beneficiary of the trust. In this scenario, the CRT must be distributed to one or more charitable organisations, but the donor and their family can modify the recommended beneficiaries. An added benefit is that, if the donor wishes, their financial advisor can manage the assets in the DAF.

There are two main types of CRTs: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). CRATs distribute a fixed annuity amount each year and do not allow additional contributions, whereas CRUTs distribute a fixed percentage based on the balance of the trust assets (revalued annually) and do allow additional contributions.

They can be the beneficiary of life insurance

A donor-advised fund (DAF) is a private account that manages and distributes charitable donations on behalf of an individual or family. DAFs are an effective way to support charitable organisations, and they offer several tax advantages.

Donor-advised funds can be named as the beneficiary of a life insurance policy, and this is a great way to continue a legacy of generosity even after passing. Naming a DAF as a beneficiary in a will, life insurance policy, or charitable trust is a straightforward way to ensure that charitable giving continues after death.

There are two main ways to do this. Firstly, by naming the DAF as the beneficiary of the life insurance policy, the proceeds of the policy will be placed in the DAF and can then be granted to chosen charities. While this strategy does not offer an income tax deduction, it allows for incredible generosity to flow from the proceeds of the life insurance policy when the policy owner passes away. Secondly, by gifting the current policy to the DAF, the DAF becomes the owner of the policy and is responsible for any unpaid premiums. In this case, the donor may receive a charitable income tax deduction, and when the donor passes away, the proceeds from the policy will go to their DAF.

Including a DAF as a beneficiary in a will, life insurance policy, or charitable trust is a flexible way to ensure that the donor's wishes are carried out, even if those wishes change over time. It also makes it easier for the designated trustee to carry out those wishes and allows for effortless adjustments to be made to how assets are distributed after death, especially if multiple organisations are to be supported.

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