Is a Donor-Advised Fund Right for You?
Written by Kevin Lawson. Kevin is a Certified Financial Planner™ and QA Managing Director.
While Donor-Advised Funds (DAFs) of one form or the other have been around since the 1930s, their popularity has increased recently providing more opportunities for people to take advantage of unique charitable giving and tax planning strategies. DAFs have become a cost-effective way to:
- Manage the tax deduction timing of your charitable donations
- Invest and grow your planning giving assets
- Provide a tangible way to include and teach future generations about giving
What is a DAF?
A DAF is a financial account offered by certain organizations that allows donors to make charitable contributions that align with their tax planning, while granting funds to charities of their choice over time. These are often used when large taxable events are occurring in a particular year, such as a business sale or exercising of stock options. These are also employed by persons with high annual incomes.
What are the tax advantages of a DAF?
Depending on the type of asset being given to charity, the donor can receive a charitable tax deduction on his or her personal income tax return of up to 60% of Adjusted Gross Income (AGI). Not only is a tax deduction available for the value of the asset contributed, but you are able to contribute appreciated assets and avoid the capital gain that would have been incurred had you sold the asset. (This is also the case for appreciated assets made directly to a charity and is subject to a limit of 30% of AGI).
The timing of the tax deduction can be important for people who no longer need to itemize their deductions due to the increased standard deduction. By utilizing a DAF, a person can make several years of charitable contributions in one year, thus taking a larger charitable tax deduction than if making only year-by-year contributions.
The DAF is funded – now what?
A DAF allows the donor to request that grants be made from the fund to charitable organizations. Since the tax deduction for the original contributions has already occurred, these distributions are then made directly to the charity with no tax impact for the donor. It can provide a great opportunity for the donor to give when there is a need versus giving at year-end to get a tax deduction. With a DAF, you can separate the timing of these two decisions related to charitable giving – the tax deduction and the distribution to the charity receiving the funds.
In addition to being able to accumulate funds in a DAF, there is also the ability to invest the funds to provide an opportunity to grow the value of the account, tax-free, allowing for grants of principal and potential earnings.
Create a legacy
While there are several tax benefits to a DAF, perhaps one of the most important benefits relates to the potential for educating the next generation about giving. A DAF can be a great way for parents to include their children in decision-making regarding charitable contributions and that decision-making authority can then be passed on to the next generation. This transfer of authority further aligns the DAF with some of the benefits wealthy families have experienced with a private foundation, but with a DAF, it can be accomplished in a simpler and more cost-effective manner.
QA Wealth Management is here to help
We provide advice related to donor-advised funds and can help you open and invest in a DAF to accomplish your giving and tax strategy goals. To see if a donor-advised fund is right for you, please contact your advisor for more information.
This article is provided for informational purposes only and nothing contained in this article should be construed as tax advice. Please consult with a tax professional regarding all tax matters including your particular circumstances.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.