What is a Donor-Advised Fund and Why Consider it?

Many people are looking to increase their charitable contributions this time of year. It can make a big difference in your taxes, but it also just makes you feel good to give back. When you have the means to support charities or the time to volunteer, it will provide you with such a rewarding feeling.

We get questions from many clients about donor-advised funds. We’d like to take this opportunity to explain a little more about what they are, how they work and how they might benefit you from a tax standpoint.

What is a Donor-Advised Fund?

Essentially, a donor-advised fund (DAF) is a public charity fund. It allows for donors to make tax-deductible charitable contributes. The assets grow in value as an investment fund, and then grants are disbursed to charities upon the donor’s requests. It’s a way to give back while maximizing the money that can be earned over time to the charities benefitting from the donor-advised fund.

There are several key steps involved in a donor-advised fund:

1. Donor Contributions

First, donors will contribute personal assets to the fund. This can include cash, stocks, real estate and other assets.

2. Immediate Tax Deduction

The donor will receive an immediate tax deduction at a maximum amount allowed by the IRS.

3. You Determine Certain Details of Your Fund

You will name your charitable beneficiaries, along with the account advisors and any successors.

4. Tax-Free Investment Growth

Whatever you contribute is placed into a specified donor-advised fund account. It is then reinvested and will be allowed to grow in value tax-free.

5. Grant Recommendations

At any time in the life of a donor-advised fund, you can recommend grants from your account and funds will be sent to qualified charities at your request.

Is a Donor-Advised Fund Right for You?

In a nutshell, a donor-advised fund is a little more complex than donating assets directly to a charity. However, it offers the potential for higher contributions over time as the fund grows in value through investment. Both options are great to help charities and provide excellent tax-deduction benefits. Ultimately, it’s up to you to decide if a donor-advised fund (DAF) is right for you and your charitable contributions.

If you would like to learn more about donor-advised funds or get started with your own DAF contribution plan, contact Illumination Wealth today. We can help you make the right financial decisions when it comes to your tax planning and overall wealth management strategy.