A donor-advised fund (DAF) is a charitable investment account that is owned by a 501(c)(3) nonprofit, but controlled by you. This article reviews 5 benefits of a donor-advised fund.
5 Benefits of a Donor-Advised Fund
Benefit #1: Get an immediate tax deduction
A key benefit of a DAF is getting a tax deduction in the year you make the contribution, even if you don’t grant all the funds to charity right away. This lets you use a strategy called bunching to get more tax benefit.
Under current tax law, many married couples could give $5K, $10K, or more to charity in a single year and get no tax benefit! This is because the standard deduction is high ($25,900, married, 2022). You must have over $25,900 of itemized deductions before you get a tax benefit from your charitable contributions.
If you bunch two years’ worth of contributions in one tax year to a DAF, you’re more likely to exceed $25,900 of itemized deductions, and thereby get a tax benefit.
Benefit #2: Avoid capital gains tax on appreciated securities
Donating cash is great, but you get more bang for your buck if you donate appreciated securities. Appreciated securities are stocks or other investments that have risen in value.
The charity can sell appreciated securities and pay no tax. If you sold the securities yourself, you’d pay capital gains tax and the charity would only get the rest.
Some charities, especially smaller ones, aren’t set up well to accept stock donations. That’s where a DAF comes in. The major donor-advised fund companies like Schwab and Fidelity accept stock and other non-cash assets all the time.
It’s a win-win all around! You donate stock to the DAF, the DAF sells the stock tax-free, and you grant the cash to charity. You get the tax benefit, and the charity gets cash without the hassle of accepting and selling the stock.
Benefit #3: Invest for tax-free growth
Donor-advised funds are also investment accounts. You invest the money in your DAF and all the growth is tax-free until you make grants to charity. The DAF is a 501(c)(3) non-profit and it technically owns the assets until you make grants.
Bonus: a donor-advised fund is much less costly to operate than a private foundation or endowment. You can use a DAF as your personal charitable endowment without having tens of millions of dollars.
Benefit #4: Get the family involved in giving
Donor-advised funds are a great way to get the family involved in giving. Once you’ve set up a DAF, the family can decide together how much to give and where. Even younger kids can have a voice!
A DAF is especially helpful for families of greater wealth. Gifts to a DAF are irrevocable, so no one in the family can inherit the money. This makes it easier to have a constructive conversation about giving.
You can also name a successor to your donor-advised fund. The successor gains the right to make grants after you die. This is a great way to have your children carry on your legacy of generosity.
Benefit #5: Give anonymously
Some donors wish to be anonymous. In the real world, this can be difficult. Even if you gave anonymously, you’d still want a receipt from the charity for tax purposes.
Instead, simply donate to your DAF and get a receipt from them. Then, grant from your DAF to the charity and leave your name out of it.
These are just five of the many benefits of a donor-advised fund. Consider using a DAF to facilitate your charitable giving.
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