Being able to give more to the causes you care about is a great financial motivator. Thankfully, this doesn’t just mean having to make more money. You can also use tax-advantaged vehicles to help make the most of what you’re able to give now.
One of these vehicles is a donor-advised fund (DAF). It provides a range of unique benefits to users and the charities they support.
In this article, you’ll learn what a DAF is, how it works, and its overall advantages and disadvantages. You’ll also be given information on how you can get started using one to support the organization(s) of your choice.
What Is A Donor-Advised Fund?
It can be helpful to think of donor-advised funds (DAFs) as investment accounts for charity. Their structure enables you to put in a variety of assets (e.g. cash, stocks, private equity, cryptocurrencies, life insurance, bonds, and shares of mutual funds) and donate them in tax-friendly ways.
It’s important to understand that a DAF is not a trust or foundation. That said, DAFs are still popular for their ease of use, and effectiveness in supporting charitable causes.
How Does A Donor Advised-Fund Work?
The creation of a DAF begins with an irrevocable donation of assets into an account managed by a supporting organization (ex: Vanguard) . As the donor, you cannot have your contributions returned to you (or anyone else) or used for anything other than supporting a charity.
Your donated assets can then grow inside your DAF tax-free. For example, if you donate cash, you can have it invested in index funds to grow overtime on behalf of the cause you’re supporting.
That said, you also have decision-making abilities over the nature of your support. You can attach specific uses or requests to your DAF’s grants that your supporting organization can relay to the charity(ies) of your choosing. For example, you can have charitable grants made “in loving memory of” someone.
Donor Advised Fund Rules
The Charity Must Be Eligible: You cannot use a DAF to support an organization that is not qualified under IRS Section 51(c)(3). This may include, but is not necessarily limited to political groups, crowdfunding campaigns, and private foundations.
You Cannot Personally Benefit: The grants from your DAF cannot provide a personal benefit. For example, you can donate to your college. However, you cannot have such donations pay for your grandchild’s tuition. DAF grants are strictly for charitable purposes, and lose their eligibility if they provide you with a personal gain.
No QCDs Can Be Made: You can donate money from an individual retirement account (IRA) to a DAF. However, your IRA cannot make a qualified charitable distribution (QCD) to your DAF.
Donor Advised Funds Pros and Cons
Asset Variety: A major benefit to a DAF is the wide range of assets you can donate. The assets you can donate to a DAF include cash, stocks, private equity, shares of mutual funds, life insurance, bonds, and cryptocurrencies.
Tax Deductions: With a DAF, you’re eligible for a variety of tax deductions. Cash donations are typically eligible for deductions of up to 60% of your adjusted gross income (AGI). Moreover, you’re also eligible for deductions on long-term appreciated assets donated to your DAF. These deductions come in the form of an eliminated capital gains tax, and income tax deduction of up to 30% of your AGI.
Tax-Free Growth: The assets in your DAF can be invested in a variety of ways through your sponsoring organization. These investments are then able to grow tax-free to maximize what will eventually go to your charities.
Easy Of Organization: DAFs simplify the recordkeeping of giving. Instead, of having to keep track of every gift you make. You can instead look at the transactional receipts created by your DAF.
Building A Legacy: DAFs allow you to build a beautiful legacy. Not only are you able to support causes you believe in, but you can also do so with specific initiatives like making a donation in the memory of a loved one.
Inaccessibility: Remember, donations to a DAF are irrevocable. You won’t be able to get your assets back even in the event of an emergency.
Fees: Depending on the sponsoring organization you choose for your DAF, you may be subject to expensive fees (e.g. administrative, investment, and maintenance fees).
Contribution Minimums: Again, depending on the sponsoring organization, you may be subject to minimum contributions. You may have to contribute a certain amount to establish your DAF, and then meet minimum thresholds for subsequent contributions.
Grant Minimums: Your sponsoring organization may also have a minimum giving requirement. This is the lowest value a grant from your DAF can be before going to a charity. Some sponsoring organizations will have higher grant minimums than others.
Anything Else I Should Know About DAFs?
What happens when the donor dies?
You’ll want to make sure you nominate a successor to your DAF. This can be a charity, an individual, or mix of the two. Without a successor, the remaining balance in your DAF may be subject to the initiatives of your sponsoring organization after your passing.
How Long can funds sit in a DAF?
DAFs do not have a mandatory distribution date. This means that funds could reside in the fund indefinitely. That said, your sponsoring organization may not allow for this. Some account providers may have rules in regards to the timing of your DAF’s disbursements to charity.
How Vertical Wealth Management Can Help?
At Vertical Wealth Management we want to help our clients over-achieve in their charitable-giving efforts. To do that, we take advantage of the giving vehicles most advantageous to them, and the causes they support.
Donor-advised funds are a powerful donating tool. They enable you to contribute a variety of assets to the charities you believe in, and make the most of your giving. That’s because they offer a range of unique tax benefits.
If you’re interested to learn more about DAFs, or get started using one to support a cause, please don’t hesitate to reach out. You can schedule your free consultation call today, and find the charitable giving strategy that’s best for you.