A donor-advised fund, also known as a DAF, is a great way to donate to various charitable organizations that you support without going through mountains of paperwork, all the while minimizing your taxes through deductions. It also offers tremendous flexibility for post-death giving, specifically if the DAF is funded as a living trust while you’re still alive.
First of all, we know the title of this blog post is a question, and that proper etiquette dictates we wait until we’re really in the meat of the blog to give you an answer as to whether a donor-advised fund is subject to probate. However, we’re going to reject tradition and tell you right now: a donor-advised fund can avoid probate at the donor’s death. So, is probate necessary for a donor-advised fund? No, the probate process is not usually required. If that is the only information about donor-advised funds and the probate process you needed, we are glad you have the answer to your question. We would also like you to know that a DAF is usually only a part of the estate planning process. To learn more about other estate planning methods that may be beneficial in providing for your loved ones, schedule a free consultation with Ball Morse Lowe.
Yet, you probably have more questions about donor-advised funds and probate laws and how they apply to one another (and how they don’t).
When we say probate is not necessary for a donor-advised fund, this is specifically true if the donor-advised fund was already funded while the donor was alive. This is referred to as a living trust. Living trusts avoid probate. In this case, the money is already essentially gone since it’s in the fund. The only situation in which it would be subject to probate is if the donor has not properly specified who should become the donor after they’re gone. That is usually taken care of when you create the fund by using “transfer on death” or “payable on death” language.
In many cases, the DAF will continue to operate and be used for charitable giving without issue after the donor’s death. However, it’s better to start the fund while alive for more than just the ease of its existence; a DAF is also an excellent way to give to charity while receiving tax deductions for the giving.
Lifetime funding also allows the donor to experience firsthand how a DAF works and, potentially, to give family members or others a chance to serve as advisors. Previewing a DAF allows the donor to test whether it makes sense to contribute additional funds during life or death.
Including a DAF in your estate plan is a great way to make sure the funds you contribute from your bank accounts, savings account, or life insurance will be dedicated to charitable purposes and managed by a public charity that has the resources and expertise to ensure the funds are properly used. You can also name family members or other loved ones to serve as current or successor advisors to help shape the future of your DAF and create a legacy of charitable engagement.
However, this is the only time where a probate court hearing could be necessary for your DAF since the funds are not actually in the fund yet and are thus named in your will. It could still avoid probate by using a revocable trust and naming the DAF as a beneficiary of the trust. If the trust is properly funded during your lifetime through the use of a living trust, no probate would be necessary at your death.
Just like you can allocate property such as real estate to your loved ones after your death, you can also choose to give property to your DAF, regardless of whether you funded it in life or death. These transfers of property qualify for the unlimited gift and estate tax charitable deduction, which may reduce or even eliminate estate taxes otherwise due after your death. A DAF can be a good alternative to forming a private foundation. You receive many of the same charitable benefits, without all of the legal and tax requirements that are involved with forming a foundation.
There are many ways to fund a DAF, both before death and after, with money such as bank accounts, savings accounts, retirement accounts, and life insurance and/or property, including real estate. If your funds and property are in the DAF before your passing, probate court is not often required or even necessary in most cases. A revocable living trust can also be used to avoid probate. However, if you want to be sure your funds are safe and sound, it’s good to speak with a probate attorney to ensure the proper language is on your will or estate plan.
For more information about allocating money for your donor-advised fund, schedule your free consultation with Ball Morse Lowe now! We’re always here to help.