Donor-Advised Fund (DAF)

Trey Gevers CFP® |

A Donor-Advised Fund (DAF) is a flexible and tax-efficient way to manage your charitable giving. It allows you to contribute assets, receive an immediate tax deduction, and then recommend grants to your favorite charities over time. Here's how you can use a DAF to enhance your philanthropic efforts:

1. What is a Donor-Advised Fund?

  • Overview: A Donor-Advised Fund is like a charitable investment account that’s set up for the sole purpose of supporting charitable organizations. You make a donation to the fund, receive an immediate tax deduction, and then have the flexibility to decide when and where to give the money.
  • How It Works: After you contribute to the DAF, the assets can be invested and potentially grow tax-free. You can then recommend grants to the charities of your choice whenever you’re ready, either immediately or over several years.

2. Benefits of a Donor-Advised Fund

  • Immediate Tax Deduction: When you contribute to a DAF, you receive an immediate tax deduction for the full amount of your donation, even if you distribute the funds to charities over time.
  • Simplicity and Flexibility: A DAF simplifies your charitable giving by consolidating all your donations into one account. You can support multiple charities from a single fund without having to manage multiple receipts or keep track of separate donations.
  • Tax-Advantaged Growth: The assets in your DAF can be invested, potentially allowing them to grow tax-free, which can increase the amount you’re able to donate in the future.
  • Anonymity: If you prefer, you can make donations anonymously through your DAF, which can be beneficial if you want to keep your giving private.

3. How to Set Up and Contribute to a Donor-Advised Fund

  • Establishing the Fund: We can work together to choose a sponsoring organization to host your DAF. This could be a community foundation, a financial institution, or a public charity.
  • Contributing Assets: You can contribute a variety of assets to the DAF, including cash, stocks, mutual funds, real estate, or even complex assets like privately held business interests. We’ll work together to determine the best assets to contribute based on your financial situation and tax planning needs.
  • Timing of Contributions: If you’re looking for a tax deduction in a specific year, you can contribute to the DAF in that year, even if you plan to distribute the funds to charities in future years.

4. Making Grants to Charities

  • Recommending Grants: Once your DAF is funded, you can recommend grants to any qualified 501(c)(3) public charity. There’s no rush—you can take your time to decide where the funds should go.
  • Grant Timing: You can recommend grants immediately after contributing to the DAF or let the assets grow over time before making distributions. This flexibility allows you to align your giving with your charitable goals and financial planning.
  • Grant Amounts: There’s no minimum or maximum amount you have to grant at any time, so you can tailor your giving to your preferences.

5. Investment Management

  • Growing the Fund: The assets in your DAF can be invested in various investment options provided by the sponsoring organization. This allows the fund to potentially grow, increasing the amount you have available to give to charity.
  • Choosing Investments: We can help you select an investment strategy that aligns with your risk tolerance, time horizon, and charitable goals.

6. Tax Planning Considerations

  • Tax Deductions: The amount you can deduct depends on the type of asset you contribute. For cash donations, you can deduct up to 60% of your adjusted gross income (AGI), and for appreciated securities, up to 30% of your AGI.
  • Capital Gains Tax: If you contribute appreciated assets like stocks, you won’t have to pay capital gains tax on the appreciation, which can be a significant tax advantage.
  • Bunching Donations: If you’re looking to maximize your tax deductions in a particular year, you can “bunch” several years’ worth of donations into one year by contributing a larger amount to your DAF. This can be especially useful in years when your income is higher than usual.

7. Creating a Legacy

  • Long-Term Philanthropy: A DAF can be part of your long-term philanthropic strategy, allowing you to involve your family in charitable giving and create a legacy of giving that continues even after your lifetime.
  • Successor Advisors: You can name successor advisors to manage the DAF after you’re gone, ensuring that your charitable intentions are carried out according to your wishes.

Conclusion

A Donor-Advised Fund is a versatile tool that offers immediate tax benefits, simplifies your charitable giving, and allows you to strategically manage and grow your philanthropic contributions. By setting up a DAF, you can support the causes you care about in a way that aligns with your financial goals and values. I’m here to guide you through the process and help you make the most of this powerful charitable giving strategy.