What is a Donor Advised Fund (DAF)?
DAFs are a flexible and efficient way to give to charity. They are essentially charitable investment accounts.
DAFs allow you to fund an account with assets like cash, stocks, mutual funds, and real estate. Your account contributions are immediately tax-deductible, and they grow tax-free in the account.
When you donate assets to a charity, the funds go directly from your account to the charity of your choice. As long as your desired charitable organization is a 501(c)(3), you don’t have to pay taxes on any of the donations.
A third party manages this type of giving account. You make recommendations to the third party based on the charities you wish to donate to. You can support multiple charities and choose when you donate through a DAF.
Most DAF accounts can be opened with a $5,000 initial contribution. And since your contributions are immediately tax-deductible, DAFs are considered tax-efficient accounts.
However, it’s important to note that DAFs are irrevocable, meaning you can’t withdraw funds from the account once they have been contributed. So, be sure that a DAF suits your unique financial and charitable giving goals and is something you’ll want to utilize long-term.
Why Use a Donor Advised Fund?
Giving through a DAF accomplishes several things at once:
- It encourages you to think in advance about giving. Planning lets you give throughout the year rather than doing it all at the late December deadline.
- It lets you fund the account with appreciated securities. Rather than pay capital gains tax on your investments to create the cash that funds the account, you simply transfer the securities with their appreciation into the DAF. You never have to pay the capital gains tax. For example, let’s say you buy a stock for $5,000 and it’s now worth $6,250. Giving it to your DAF instead of selling it for cash means you don’t pay taxes on the $1,250 in stock appreciation.
- It lets you have deeper conversations with yourself or your loved ones about what cause(s) you want to support. Even if you fund the DAF in a particular year, you don’t have to give away every dollar in the account by the end of that year. Any funds that remain invested in a DAF continue to be invested (and hopefully grow), which could earn you even more funds to give away.
DAFs are also a great way to use a tax-savvy charitable giving strategy called “bunching.” This means you frontload your fund with a few years’ worth of gifts so you can itemize them and take the tax deduction immediately, all at once. From there, you can spread the actual donations over multiple years.
Cash deductions are generally limited to 60% of your adjusted gross income (AGI) for the year. If you exceed that, you can roll the deduction over to the next year (for up to five years). If you give more than you can deduct from your AGI in one year, you can carry that excess amount forward to reduce your AGI and save on your future taxes for up to five years.
Expanding Your Charitable Giving
Sharing your wealth, time, and talents with others is a meaningful way to give back to your community. If you think a DAF fits your charitable giving strategy, have questions about charitable giving in general, or simply don’t know where to start, please reach out to an Abacus advisor today.
We genuinely look forward to helping you discover new avenues on your giving journey.
