What is a donor-advised fund?
A donor-advised fund (DAF) is like a personal charitable giving savings account. It allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. The donor can contribute cash, appreciated assets, or investments. Many brokerage firms offer these accounts (think Fidelity, Schwab, & Vanguard) but with varying minimum required investments ranging from $5,000 to $25,000.
Is there a tax benefit?
This is a great tax planning vehicle to lump planned charitable giving deductions in one year and spread the donations into the future. For clients on the cusp of itemizing deductions, this could tip the scales by bunching planned giving into a single year. If you are unsure who you want to give donations to, this is a way to take the deduction now and decide on the charity later. For appreciated securities, you take a deduction on the fair market value of the stock without recognizing the capital gains that would be associated with a sale. There is a limit of 30% of your AGI on donating appreciated assets in a given year.
How does it get to the charity?
Simply ask for a grant from your DAF to the qualified charity of your choice. When you give to charities, the DAF will track your contributions and provide a single tax document which will reduce your record keeping requirements. The DAF will also make sure that your charity is a 501(c)3 registered charitable organization and that the donation is fully deductible.
What happens to the money in the account?
Just like a 401(k) or IRA you can choose how to invest your contributions in mutual funds, exchange traded funds, or cash accounts. Your money could work harder for those charitable organizations and grow tax-free until you make a grant to your given charity.
Are there any downsides?
There will be fees charged by the DAF, typically around 1%, but check out these costs with the fund sponsoring the DAF. However, if your fund is earning and growing this may outweigh any associated fees.
There is no government requirement for when distributions must be made to charities and some critics see this as a downfall. To make sure you donate regularly, set reminders or create a schedule for your giving.
Grants from donor-advised funds account for more than 4 percent of all giving in the United States (over $20 billion annually) and are growing in popularity.
If you have any questions about how a donor-advised fund could impact your tax situation, reach out to our team.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.