Charitable giving continues to remain prevalent, with the level of philanthropic gifts continuing to hit new highs. One method, donor-advised funds, is growing in popularity.
What is a donor-advised fund?
A donor-advised fund (DAF) is a separately identified fund or account that allows you to deposit assets for charitable contributions and receive an immediate tax deduction. Then, in the future, those contributions are directed to other charities as frequently as you like.
Donor-advised funds are maintained and operated by a sponsoring organization, a section 501(c)(3) organization established to sponsor and act as an administrator for DAFs.
Many donors use DAFs for individual or family giving. However, increasingly DAFs are being adapted to simplify workplace giving programs, facilitate online fundraising platforms and expand other models of philanthropy. Their popularity is due to their flexibility, allowing donors to give in a manner that is most favorable for them.
A DAF can be a desirable option if:
- You have charitable inclinations and are looking to maximize the tax benefits.
- You want to make a tax-deductible charitable contribution immediately but still need some time to determine which charities you’d like to support with grant recommendations.
- You are considering a concentrated giving strategy with several years’ worth of contributions but would like to maintain gifting over time for specific charities.
- You are looking for a way to contribute non-cash complex or illiquid assets to charities that cannot take those types of donations.
How does a donor-advised fund work?
A DAF is like an investment account for the sole purpose of receiving your charitable contributions, then supporting charitable organizations you care about over time.
When you contribute cash, securities, or other assets to the DAF, you are eligible to take an immediate tax deduction. Those assets can be invested for tax-free growth, and you can then direct charitable gifts to any IRS-qualified charity from the account.
What are the benefits of donor-advised funds?
There are many reasons donors choose a donor-advised fund as a philanthropic giving vehicle. Potential benefits include:
Flexibility in the types of assets that can be contributed
Depending on the sponsoring organization, you can donate:
- Cash
- Stocks, bonds and mutual fund shares
- Private company stock
- Private Equity
- Hedge fund interests
- Restricted stock and pre-IPO shares
- Life insurance
- Cryptocurrency
- Real estate
- Oil and gas interests
- Collectables
Maximizing the tax benefit associated with charitable giving
Realize it immediately — you can claim a tax deduction in the year you contribute assets to the donor-advised fund, even if the contribution goes to the charity over time.
Lower capital gains taxes — donating appreciated non-cash assets provide a unique opportunity to potentially eliminate the capital gains tax you would incur if you sold the assets yourself and donated the proceeds, which may increase the amount available for charity by up to 20%. Also, you may claim a fair market value charitable deduction for the tax year in which the gift is made, and offset taxes incurred elsewhere, or you could choose to pass on those savings in the form of more giving.
Lower estate taxes — donations to a donor-advised fund are irrevocable, meaning that once , they belong to the fund. Since those assets no longer count toward your total estate value, they aren’t subject to estate taxes.
Continue growing your donation tax-free
One of the attractive features of DAFs is that donated assets can be invested and earn returns without being taxed. As there is no requirement for when you must direct the contributed assets to a qualified charity, contributions can be invested and allowed to grow in the markets, expanding the impact of future charitable gifting well beyond the originally gifted amount.
Empowering your legacy planning
Donor-advised funds can play a role in estate planning and facilitate your charitable bequests. You can direct assets to a DAF in your will or make the sponsor a beneficiary of a retirement plan, life insurance policy, or charitable trust, helping reduce or eliminate the estate tax burden for your heirs.
You can also break the fund up into multiple smaller funds to pass down to different successors, so they can continue your legacy of giving and support charities important to them in the years to come.
The impact of DAFs on the world of philanthropy is growing as more donors turn to DAFs to meet their philanthropic goals. They allow active donors to support a wide range of causes in an effective and efficient method of charitable giving.
If you have questions or need guidance on how to effectively maximize your charitable impact while reducing your tax burden, we can help.
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.