Money Matters
Donor Advised Funds: An Innovative Way to Give
Donor Advised Funds: An Innovative Way to Give
Enhancing Your Philanthropic Strategy with Donor Advised Funds
According to the National Philanthropic Trust, American individuals donated $319 billion to charitable organizations in 2022, and according to the Urban Institute, there are 1.5 million charitable organizations registered in the United States.
Have you wanted to make charitable contributions but felt uncertain about how or when to distribute your donations, or how tax deductions would apply? If so, a donor advised fund might just be the answer for you.
What is a Donor Advised Fund?
A donor advised fund (DAF) is a philanthropic vehicle that was formally written into the Tax Code in 2006. This fund allows donors to make irrevocable contributions into an account that they control. These contributions can only be withdrawn by making a distribution (called a Grant) to a qualified 501(c)3 charitable entity. The money cannot be withdrawn by the owner, a family member or their heirs for any other purpose.
The key advantage of a donor advised fund over direct charitable contributions lies in its flexibility with timing. Both the initial contribution to the DAF and the subsequent Grant to the charity can be strategically timed, unlike direct donations. Here are a few of the additional details and definitions:
- Contributions: Donors contribute to a DAF and receive a tax deduction in the year that their contribution is made. They may contribute cash, securities, or other types of assets.
- Gifts of Appreciated Securities: Individuals who have appreciated securities or other appreciated assets can avoid the tax that would be due upon sale, by transferring those securities to the DAF. Since it is a philanthropic vehicle, and the donation is irrevocable, there is no tax obligation for the donor when the security is sold once it has been contributed into the account.
- Tax Deduction: The tax deduction available to the donor is the actual cash amount donated or, if securities are donated instead of cash, the actual value of the securities the day the donation is made.
- Distributions (Grants): Grants from the DAF are directed by the account owners. Currently, there are no particular rules or timing restrictions for these grants. While it is encouraged to distribute the funds to charitable organizations, there are no legal requirements on when the grants must be made.
- Investment: Once contributions are made to a DAF, any securities are generally sold and reinvested in a diversified portfolio managed by the DAF sponsor. These assets grow tax-free until they are distributed as grants. If the account increases in value, a higher amount can be distributed to charities later.
- Granting: The owner of the DAF directs how and when money in the account is distributed. The only requirement is that any grant must be made to a 501(c)3 charitable entity.
Why are DAFs Important?
Donor advised funds (DAFs) offer a range of significant benefits that make them a compelling choice for philanthropic individuals. These funds provide tax advantages, simplify the process of charitable giving, and offer flexibility in how and when donations are made. Additionally, DAFs can play a crucial role in legacy building, allowing families to engage multiple generations in charitable activities. Here are some key reasons why DAFs are important:
- Tax Efficiency: Donors receive a tax deduction in the year they contribute to their DAF. They usually can deduct up to 60% of their adjusted gross income (AGI) for cash contributions and up to 30% of their AGI for donated securities. Due to past changes in the tax laws, which increased the standard deduction considerably, it has become more common to “bunch” charitable contributions, making the equivalent of two years’ worth of contributions in one year and skipping the next. The DAF is ideal for this strategy.
- Simplicity: DAFs provide a simpler alternative to managing a private foundation. There is very little administrative cost, no hassle and they are very easy to set up and maintain.
- Flexibility: Donors have the flexibility to support the charities of their choice at their own pace.
- Legacy: DAFs can be a tool for family philanthropy, involving multiple generations in charitable giving. Once a DAF is established, the entire family can have input on how and when grants are made.
Additional Potential Benefits of Using DAFs
- Immediate Tax Deduction: Make a contribution and enjoy the tax benefits in the same fiscal year.
- Philanthropic Impact: Maximize the charitable impact by investing the funds and potentially increasing the amount available for grants in the future.
- Estate Planning: DAFs can be part of an estate plan, providing a lasting legacy and continued support for important causes.
- Record-Keeping: All record-keeping is handled by the sponsoring organization, which simplifies the donor’s tax reporting.
Although donor advised funds were formally recognized in the Tax Code in 2006, they have become increasingly popular as an effective tool for philanthropy.
Unlock the full potential of your charitable giving with donor advised funds and learn how to optimize your investments for lower taxes. Consider the advantages of DAFs as part of your financial strategy in an effort to maximize your charitable impact.
Dive deeper into strategic tax planning in our comprehensive blog post: The Art of Tax Planning: Optimizing Your Investments for Lower Taxes.
Connect with OneDigital’s Wealth Management team to learn more.
Investment advice offered through OneDigital Investment Advisors LLC, an SEC-registered investment adviser and wholly-owned subsidiary of OneDigital.
These materials are provided for informational and educational purposes only and do not constitute a recommendation to buy, sell, or hold any security, nor do they constitute legal, accounting, investment, or tax advice. The materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. All included information and data are limited only to the inputs and other financial assumptions indicated.