Donor Advised Funds can be a tax-beneficial vehicle for charitable contributions. Curious about how they could work for you?
What is a Donor Advised Fund? #
A Donor Advised Fund (DAF) is a fund, usually managed by an investment company, that allows you to donate your charitable funds at a time that is most advantageous for your tax situation, while retaining the ability to recommend when the funds should be disbursed to your chosen charities. It is different from a private foundation because you do not have to deal with the management or reporting obligations of the organization.
How do I participate in a Donor Advised Fund? #
Here’s the general process:
- You provide the funds to the DAF and take the tax deduction in the year of your contribution.
- In exchange for a flat fee or a percentage of assets under management, the DAF allows you to invest those funds in a variety of assets, according to your risk tolerance and timeline.
- When you are ready to send those contributions to a charitable organization, you recommend that donation to the DAF, and they disburse the funds on your behalf.
Why would I use a Donor Advised Fund instead of donating directly to a charity? #
As always, consult with your tax adviser before setting up a DAF; this is not investment or tax advice.
These situations may warrant using a DAF:
- If your income varies from year to year but your contributions don’t
- If your deductions are below or very close to the standard deduction
- If you received a sudden windfall (e.g., inheritance, vesting restricted stock units, proceeds from a real estate sale) and know that you want to use some of it for charitable contributions in the future, but you want to get the tax advantages of those contributions now
- If you have marketable securities you want to donate in the future after they appreciate, but you want to avoid capital gains taxes that would otherwise result from that donation
In these situations, you can consolidate your charitable donations in a year that maximizes your itemized deductions, which shields more of your income in that year from taxes. Then, you can recommend disbursements to your chosen charities whenever you choose in the future with no tax consequences.