If you’re looking for a way to make your charitable giving more strategic, tax-efficient, and organized, you might want to investigate a Donor-Advised Fund (DAF).
Often described as a “charitable savings account,” a DAF is one of the fastest growing giving vehicles in the country.
Here is everything you need to know about how they work and why they might be the right fit for your philanthropy.
What is a Donor-Advised Fund?
A DAF is a private fund managed by a sponsoring organization (like a community foundation or a national investment firm) that allows you to make a charitable contribution, receive an immediate tax benefit, and then recommend grants from the fund to your favorite charities over time.
How It Works in 3 Simple Steps
- Contribute: You make an irrevocable contribution of assets—such as cash, stocks, or even real estate—to the fund.
- Grow: While you decide which charities to support, the assets in your DAF are invested and can grow tax-free, potentially increasing the amount you have available to give.
- Grant: You recommend grants from the fund to IRS-qualified 501(c)(3) non-profits (like our food pantry!). You can do this immediately or wait until a time of year when your favorite causes need it most.
Why Use a DAF?
- Immediate Tax Relief: You receive a tax deduction the moment you contribute to the fund, even if you don’t distribute the money to a specific charity until years later.
- The Power of Appreciated Assets: By donating appreciated stock or mutual funds directly to a DAF, you avoid paying capital gains tax. This can increase your giving power by up to 20% compared to selling the stock and donating the cash.
- Simplified Record Keeping: Instead of tracking dozen of receipts from various non-profits, you get one single tax receipt from your DAF sponsor for your contributions.
- Legacy Planning: You can name successors (like children or grandchildren) to manage the fund after you’re gone, turning your generosity into a multi-generational family tradition.
The “Bunching” Strategy
With the higher standard deduction in recent years, many donors use a “bunching” strategy. This involves contributing two or three years’ worth of planned donations into a DAF in a single high-income year to surpass the itemization threshold, then using the fund to maintain consistent annual support for their favorite charities.
Ready to make an impact?
If you already have a DAF through an organization like Fidelity Charitable, Schwab Charitable, or a local community foundation, you can recommend a grant to support our upcoming renovations and volunteer program today!
Disclaimer: This blog post provides general information and does not constitute legal or financial advice. It is essential to consult with qualified legal and financial professionals to discuss your individual circumstances and ensure your estate plan aligns with your specific goals and applicable laws.
Photo by Katt Yukawa on Unsplash
