Donor-advised funds, or DAFs, are becoming more popular with business owners and highly compensated individuals because of their many advantages.
DAFs have been compared to a savings account dedicated to charitable contributions. Although that’s an overly simplified analogy, the concepts are not dissimilar. Although they have been around for decades, these philanthropic funds are more popular than ever, in large part because they provide a high degree of flexibility.
DAFs also reward donors by providing significant tax advantages.
What Are Donor-Advised Funds?
The basic definition of a donor-advised fund is an investment account used exclusively for making irrevocable charitable contributions. With a DAF, you can advise the fund’s managers about how to donate funds. Or, if you prefer, you can leave those decisions to the account’s sponsor.
You can contribute cash to the fund as well as other valuable assets, including stocks and other securities, real estate, collectibles, cryptocurrency, shares of privately held corporations, etc.
DAFs require a 501(c)(3) to act as their sponsoring organization. This can be a public charity, a community foundation or an investment firm. You can choose when the funds are donated and in what quantities. You can also leave some portion of the funds in the account and use investment strategies to grow the balance tax-free.
Philanthropic Advantages of Donor-Advised Funds
Donor-advised funds provide substantial benefits for the charitable causes you care about most.
You can direct your contribution to virtually any cause or organization that qualifies under the IRS rules for tax-exempt status.
Compared to private foundations, DAFs offer the same primary benefit — deciding specifically how you want your contributions to be distributed — but without the time, administrative requirements or costs associated with a foundation. The fund’s sponsor manages the investments, grants and all administrative tasks, allowing the donor to devote their time and attention to the most important part: charitable giving.
You can donate to an existing DAF. However, many business owners and high-net-worth individuals choose to set up their own funds with other family members or associates. You can establish a low contribution threshold to help introduce even the youngest family members to the importance of charitable giving.
Tax Advantages of Donor-Advised Funds
You can take advantage of the available income tax deductions for the year in which you contribute to a DAF and you can deduct the full market value of real estate and shares of closely held stock — subject to adjusted gross income (AGI) limits.
You will incur no capital gains liability for any appreciated assets you contribute, and DAF contributions are not subject to estate taxation.
Compared to contributions to a private foundation, AGI limits are essentially twice as high for DAFs. DAFs have no minimum annual grant requirement and they are not subject to excise taxes.
The tax attorneys of Cantley Dietrich understand how important your charitable contributions are. You’ve worked hard for your money and you should be able to put it to work as you see fit. We can help you incorporate charitable giving as a part of your estate planning, tax planning and wealth preservation strategies. Contact us today to learn more about how donor-advised funds can assist you in this endeavor.
NOTE: This article is for informational purposes only and should not be construed as providing legal advice. Use of this site does not create an attorney-client relationship. Contact an attorney to obtain legal advice.