Have you ever considered how your charitable giving could be more than just an act of generosity? Donor-Advised Funds (DAFs) offer individuals a strategic way to donate to charities. A DAF is a charitable investment account that allows you to make irrevocable contributions of cash, securities, or other appreciated assets. This can serve as a financial tool for reducing tax liability, establishing a legacy, or fostering philanthropic involvement in future generations. These accounts can be particularly advantageous when navigating a liquidity event, such as the sale of a business or during high-income years. Grants must be made to IRS-qualified tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code.
How may a Donor-Advised Fund help you?
1. Tax Benefits
- Immediate Tax Deduction
Contributions made into a DAF are tax deductible in the year they are made. Note: The amount you can deduct for cash contributions to a charity is generally limited to no more than 60% of your adjusted gross income (AGI). - Capital Gains Tax Elimination
When you contribute a highly appreciated asset, such as stocks or real estate, you can avoid paying capital gains tax that would apply if you sold them yourself, while receiving a deduction for the full fair market value (FMV). This is an efficient way to convert portfolio gains into charitable giving and may increase the amount available for charity by as much as 20%. Note: The amount you can deduct for long-term appreciated assets is generally limited to no more than 30% of your AGI at FMV. - Flexible Timing
You can make contributions into a DAF and decide where to direct funds later. This provides you with flexibility to thoughtfully consider when and to whom your charitable grants will be made.
2. Strategic Charitable Giving
- Establish a Long-Term Charitable Legacy
A DAF enables your charitable giving to continue beyond your lifetime. You can establish guidelines, such as a dollar amount or percentage of the assets that you would like to have granted over time, supporting a lasting legacy. - Engage Your Family and the Next Generation
DAFs can be a helpful way to involve children and heirs in charitable decisions by teaching shared values and promoting multigenerational involvement in charitable giving. - Integrate into Estate Planning
Making contributions to a DAF can reduce the size of your taxable estate while ensuring that some of your wealth is being directed to charities that are important to you.
3. Ideal for High-Income or Liquidity Events
- High-Income Year
Use a DAF to offset a high-income year by making a significant charitable contribution thereby reducing taxable income. - Event-Based Liquidity
For those selling a business or realizing a large capital gain, DAFs can help manage the tax impact by setting aside funds for future giving.
4. Simplifying Administration
- One Account for All Charitable Giving
A DAF allows you to manage all your charitable giving through one account, eliminating the need to track receipts from multiple organizations. - Simplified Recordkeeping
All contributions, grant activities, and investment performance are recorded in one place, simplifying year-end reporting. - No Administrative Burden
Unlike private foundations, DAFs:- Do not require annual tax filings
- Do not mandate board meetings or minimum distributions
- Have no ongoing legal or compliance overhead
Is a Donor-Advised Fund right for you?
A DAF can serve as a powerful financial tool that can be used in a variety of strategic ways. They allow investors to maximize their impact on their communities, minimize taxes, and build a legacy that lives on. If you’re looking to maximize your charitable impact in your financial plan, a DAF may be the right account for you.
This content is for informational purposes only and does not constitute financial, tax, or legal advice. Please consult with your tax advisor, attorney, or financial professional for personalized advice regarding your specific situation.
