Understanding Northern Michigan Donor Advised Funds
Donor-Advised Funds (DAFs) have become one of the fastest-growing charitable giving tools in Northern Michigan. Individuals, families, and businesses use them to simplify philanthropy, receive immediate tax deductions, and distribute gifts over time—often supporting local nonprofits in Traverse City, Petoskey, and beyond. But behind their popularity are important legal, tax, and governance rules that donors and recipient organizations must understand.
This guide offers a clear overview of how DAFs work under Michigan and federal law, how to set one up regionally, best practices for administration, and how True North Legal Group can support DAF users and nonprofit partners.
What Is a Donor‑Advised Fund?
A DAF is a charitable account held at a sponsoring organization—such as a community foundation, religious endowment, or financial-services provider—that allows donors to contribute assets and retain advisory privileges over how and when grants are made, provided those assets go to IRS-approved charities. Contributions are irrevocable and immediately tax-deductible, including cash, publicly traded securities, and sometimes real estate.
Unlike private foundations, DAFs have fewer administrative requirements. Donors don’t have to file annual returns, meet a mandatory payout rate, or manage a nonprofit board—though they must follow rules on advising grants and asset holdings.
Growth & Local Impact
Nationally, donor-advised funds grew to over $251 billion in assets by 2023, with more than 1.7 million accounts and a payout rate above 20%. In Michigan, community foundation DAFs continue to drive local impact. Case studies from the Petoskey-Harbor Springs Area Community Foundation show that DAFs enable donors to tap into local nonprofits’ expertise, strengthening community ties and resource allocation.
Locally, the Northern Michigan Catholic Foundation and McLaren Northern Michigan offer DAFs that support Catholic ministries, healthcare, and community causes. Donors appreciate their ability to invest assets responsibly, engage heirs in philanthropy, and create long-term legacies .
Types of DAFs and How They Work
DAFs come in two main forms:
Endowed (permanent) funds focus on long-term giving and typically maintain a minimum balance—often distributing only a fixed percentage annually.
Spendable (non-endowed) funds allow donors greater flexibility, enabling distributions that may even draw the fund’s balance down to zero.
Many regional DAF sponsors, including the Northern Michigan Catholic Foundation, allow donors to name successor advisors—often children or grandchildren—ensuring the fund’s charitable use extends across generations.
Legal Rules & IRS Requirements
DAF sponsors hold legal control over the fund and its assets. Donors merely advise, and formal control remains with the sponsoring organization. IRS restrictions limit grants such that they cannot benefit the donor, their family, or related parties. Grants are made only to qualified public charities and cannot reimburse donors for personal expenses or satisfy pledges.
Other critical rules include:
- Excess business holdings: DAFs cannot take on large ownership stakes (generally more than 20–35%) in private businesses; if they do, the business must be sold within a set timeframe.
- Payout practices: While DAFs are not required by law to distribute funds annually, many sponsors encourage regular giving. In 2023, national payout rates remained above 20%.
- Regulatory oversight: The IRS and state regulators are considering enhanced DAF reporting rules for transparency, particularly regarding retained earnings and taxable distributions.
Steps to Establish a DAF in Northern Michigan
|
Step |
Description |
|---|---|
|
Choose a Sponsor |
Options include community foundations (e.g., PHSACF), healthcare-related DAFs (e.g., McLaren), or national sponsors (Fidelity, Schwab). |
|
Select Fund Type |
Decide between endowed or spendable based on legacy goals and giving timelines. |
|
Make Asset Gift |
Gifts can include cash, stocks, or real estate. Contributions are irrevocable and tax-deductible at market value. |
|
Name Advisors |
You can designate successors to carry giving forward. |
|
Advise Grants |
Submit written recommendations—minimums typically start at $250—and the sponsor handles due diligence and payment. |
Best Practices for Donors and Nonprofit Partners
- Donors should communicate grant intentions clearly and provide appropriate fund identification to ensure timely receipt by nonprofits.
- Nonprofits must verify grant eligibility and avoid accepting restricted or improperly designated funds.
- Both parties benefit from understanding fund terms, including minimum grants, reporting frequency, administrative fees, and successor advisor options.
Consider setting up a regular schedule for reviewing your DAF—quarterly or annually—to evaluate fund performance and ensure charitable outcomes align with donor intent.
Key Takeaways for Northern Michigan Donor-Advised Funds:
- DAFs offer a flexible, tax-efficient way to support your community while engaging family and managing philanthropic legacy.
- Michigan-based sponsors provide both endowed and spendable options, often with local giving insight and succession planning tools.
- Understanding IRS rules—such as advisor vs. owner status, excess business holdings, and grant restrictions—is essential.
- Collaborative communication between donors and nonprofits ensures that gifts are compliant, respectful of intent, and impactful.
How True North Legal Group Can Help
True North Legal Group advises clients on establishing and administering DAFs that align with their values and comply with legal requirements. Our services include:
- Assisting with asset selection and tax benefit analysis
- Reviewing and negotiating fund agreements to support successor planning
- Advising on grantmaking discretion and donor responsibilities
- Counseling nonprofits on DAF acceptance procedures and fund handling
- Monitoring regulatory updates—especially new IRS rules—to adapt donor and nonprofit practices
Our goal is to empower Northern Michigan residents and organizations to build sustainable, compliant, and mission-driven giving programs. If you’re considering launching a DAF, advising one, or accepting grants from these funds, reach out to True North Legal Group. We’ll help you harness the power of donor-advised philanthropy while safeguarding legal integrity and community impact.