Why Clients Are Naming DAFs as the Charitable Beneficiary in IRAs
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This column first appeared in American Endowment Foundation's AEF Insights here.
Donor-advised funds (DAFs) have grown steadily in popularity due to the ease of administration and control they offer donors over their charitable gifts. Their advantages are increasingly being put to use by selecting DAFs as IRA beneficiaries.
Tax benefits, while not the sole reason for these designations, clearly remain at their core. And a desire to lessen future estate tax liabilities is a current catalyst, given the likelihood of tax rates being raised to address growing government budget deficits.
For clients who are hovering around the exemption levels, naming a DAF as charitable beneficiary in an IRA can be a comparatively quick and easy way to minimize the estate tax.
A couple of our clients have made this designation recently and the estate tax was the common factor. One had no federal estate tax liability but did have state estate tax liability. Changing the IRA beneficiary to a DAF was a simple way to eliminate the state estate tax. In the other case, a Florida client changed his IRA beneficiary so his children got his estate and the amount that would have gone to the federal estate tax now will go to the DAF upon his death.
Leaving IRA benefits to charity through a DAF may not move the needle for billion-dollar estates. It can work well, however, for those who can get within the federal or state exemption level by doing it.