The National Philanthropic Trust describes donor-advised funds (DAFs) as being “A charitable savings account [in which] a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.”
Donor-advised funds are charitable funds administered by a third party — a sponsor. You contribute cash, securities, or other assets to the fund and get tax benefits.
You direct how the money is invested and can donate the money at any time in any amount to any IRS-qualified public charity.
The key benefit of donor-advised funds is tax efficiency. However, there are numerous other advantages.
Contributions go beyond cash: You can donate a wide range of asset types, including: cash and cash equivalents, publicly traded securities or mutual fund shares, restricted stock, cryptocurrencies, private equity interests, and even privately held C-corp and S-corp shares.
Tax Efficiency: These accounts can be hugely tax efficient. However, the tax benefits vary depending on the type of asset you are donating.
- Cash: If you donate cash to the fund, you will usually get a federal income tax deduction of up to 60% of adjusted gross income. And, your contribution will grow tax-free. You won’t pay any additional taxes on the growth.
- Asset: If you donate an asset, you will become eligible for an income tax deduction of the full fair-market value of the asset up to 30% of your adjusted gross income. And, because you are not liquidating the asset, you will eliminate any capital gains tax you might pay, as long as the asset has been held for more than a year. This is of particular benefit if you have a highly appreciated asset.
Simplified record keeping: Instead of tracking receipts for every charitable donation, when you use a donor-advised fund you only need to track your donations to the fund.
All IRS-qualified public charities are eligible for your donations: Any IRS-qualified public charity can receive donations from a donor-advised fund. You can contribute to one charity or many.
You control timing of donations: You can drip out your money slowly over time or all at once. You can contribute to a DAF even if you don’t immediately know where you want the money to go, but at least know you are charitably inclined.
Many find that the tax efficiencies of donor-advised funds outweigh any potential downside, but there are some things to consider before taking the leap into a fund.
Contributions can’t be backed out: Money you contribute to a donor-advised fund cannot be returned. You are making a permanent commitment to charity when you deposit money.
Fees: Investigate the fees associated with your donor-advised fund. Ask questions of your fund sponsor. Fees may be on par with an investment account or much higher.
Account Minimums: Some sponsors require an initial minimum donation and minimums for additional contributions.
Minimum donation amounts: Some sponsors have a minimum donation amount for distribution to charities.
Money on the sidelines: According to research reported by The Chronicle of Philanthropy, in 2019, there was more than $110 billion sitting in donor-advised funds instead of being granted to charities.
Think carefully about when and how you want your money allocated to the organizations you want to support.
Fewer choices of investments: Depending on the sponsor, you will probably have more limited choice when it comes to how to invest your money.
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