When giving to a charity, you want to be smart and effective with your charitable contributions. One way to do that is by using a donor advised fund (DAF). A donor advised fund is a charitable investment vehicle that is sponsored by a public charity. One potential benefit of a DAF – your charitable contribution is eligible for an immediate tax deduction, even though you can distribute the donation over time. If you had already planned to make charitable donations, this could be big news!
Why a Donor Advised Fund?
A DAF is a cost-effective, flexible way for donors to get maximum tax benefits for supporting the causes they care for. You can donate things such as cash, stocks, real estate or non-publicly traded assets to support any IRS-qualified public charity. You can choose to donate to your chosen charities immediately, or over time.
How does a DAF work?
A donor advised fund can be explained in five simple steps:
1. Make an irrevocable contribution of your personal assets.
2. Receive the maximum tax deduction allowable by the IRS.
3. Name your donor advised fund account and establish your advisors as well as any successors or charitable beneficiaries.
4. Your contribution will be placed in a DAF account where it can be invested and grow federally tax-free.
5. Once your account is set up you can recommend grants to the qualified charities of your choice.
What are the tax benefits?
For many, the tax advantages of a DAF are what makes them most appealing. As mentioned before, donors receive an immediate tax deduction when they make a contribution to a donor advised fund. For a cash donation, you’re generally eligible for a tax deduction of up to 50% of your adjusted gross income. For long term appreciated assets, such as stocks, bonds or real estate, you can take an income tax deduction of up to 30% of your adjusted gross income, and because you’re donating these assets to charity, you generally won’t have to pay capital gains.
What other potential advantages to DAFs have?
There are many other possible advantages to these donor advised funds, particularly in the area of convenience. They are not difficult to create and do not require an attorney. They are also more flexible than private foundations – which usually involve more reporting and can have higher administrative costs. DAFs also promote proactive giving and creating a gifting strategy, thanks to their ability to let you choose your own schedule for disbursements.
What are the disadvantages to DAFs?
Though donor advised funds have many positives, there are still criticisms of this type of account. Because there is no minimum payout rule, some critics argue that although there has been an increase in DAF accounts, no more money is being given to charities annually as people use their DAFs as tax shelters, rather than for their intended purpose. There’s also the psychological component, where donors feel charitable when putting assets into these funds, but in reality there is zero charitable impact until they grant the money to nonprofits.
Ultimately, you should speak with your financial advisor to see if a donor advised fund is right for you. If it is, it could provide a way for you to give more to charity and pay less in taxes. If you have any questions, feel free to give us a call at Walsh & Associates. We’re a comprehensive, fee-based financial planner in Sarasota, FL and DeKalb, IL, with over 30 years of financial planning experience.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. No strategy assures success or protects against loss.