Donor-advised funds (DAF) are one of the most underutilized tax and charitable giving strategies. These charitable funds give individuals a chance to support their favorite charitable causes while reducing taxes and giving away potential tax liabilities. However, the rules of a DAF are different than traditional charitable gifts. See how it works and who it benefits before setting one up.
Donor-Advised Fund Basics
A DAF allows people to give appreciated assets such as stocks or real estate to charity in order to receive a tax deduction immediately. However, the holder isn't required to decide on their preferred charity at the time of donation. Instead, they can spread their charitable gifts out over time and they can even invest the funds within their DAF to potentially grow to a larger dollar amount.
Some people will use a DAF in lieu of setting up a private charitable foundation while others will front-load their account to give themselves enough time to grow their charitable assets. Any charity that has been approved by the IRS is eligible to receive a grant from a DAF.
How to Donate to a Donor-Advised Fund
The first step is to select a DAF organization. Each one will have their own fees and restrictions for holding onto the funds. Account holders can then gift their appreciated assets to the DAF. This can be anything from cash, to stocks, real estate, or even bonds. Once the DAF has been established and funded, the account holder can choose to make charitable grants immediately, or alternatively wait and allow the funds to grow over time.
Donor-Advised Fund Tax Information
Gifting appreciated assets to a DAF allows for an immediate tax deduction, and in addition allows the account holder to forgo paying any capital gains taxes on the appreciated asset. It’s a win-win for both the account holder and the charity.
Any contributions made to a DAF are classified as a 501(c)(3) gift. The IRS allows the individual to give up to 50% of their Adjusted Gross Income in cash and up to 30% in other types of assets.1 Liquid gifts such as cash and stocks are taken at market value, but illiquid investments will need to be evaluated by an independent appraiser for the exact monetary value. Individuals who want to exercise specific investment strategies will need to check with the organization or investment advisors. Each one will have their own list of approved means of growing the funds.
There is a lot to consider when it comes to getting the most out of DAF. However, it may be a good choice for individuals who want to maximize their charitable donations as well as reduce their tax liability.
1 https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions
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