How to Leverage Donor-Advised Funds (DAFs) for Tax Efficiency

May 22, 2024
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When it comes to philanthropy, the adage “not only giving but giving wisely” is a great approach to consider. This is especially true for successful entrepreneurs looking to make a meaningful impact with their wealth. Donor-Advised Funds (DAFs) have emerged as a powerful tool for strategic giving, blending philanthropic intent with tax efficiency.

DAFs act as a philanthropic vehicle. They allow donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. This structure provides not just tax benefits but also flexibility. Donors are able to strategically plan their philanthropic activities.

Immediate Tax Benefits and Timing Flexibility

One of the most appealing aspects of DAFs is the immediate tax deduction they offer. Upon contributing cash, securities or other assets to a DAF, donors can deduct up to 60% of their adjusted gross income (AGI) for cash contributions and up to 30% for appreciated assets. This immediate deduction, coupled with the ability to spread out grants over time, enables donors to align their philanthropic impact with their financial planning and tax strategies.

Simplifying Philanthropic Efforts

Managing philanthropic endeavors can be complex, particularly when dealing with multiple charitable contributions. DAFs streamline this process by consolidating donations into one account. This simplifies record-keeping, while also offering donors the chance to thoughtfully plan their philanthropic strategy without the pressure of immediate distribution decisions.

Investing for Growth

Another advantage of DAFs is the potential for the contributed assets to grow tax-free within the fund, increasing the impact of future grants. Donors can recommend how the funds are invested, potentially amplifying their charitable impact over time.

A Tool for Legacy Planning

For those looking to create a lasting philanthropic legacy, DAFs offer a way to involve family members in philanthropy. This can foster a spirit of strategic giving in future generations. By engaging family members in the decision-making process of grant recommendations, donors can pass on values of philanthropy with a financially sound approach.

Donor-Advised Funds represent a combination of strategic philanthropy and tax planning. These funds provide high-net-worth individuals with a flexible, efficient and impactful way to manage their charitable giving. As part of a holistic wealth management strategy, DAFs offer a meaningful avenue to fulfill philanthropic goals while optimizing tax benefits. Donors can leverage DAFs to ensure that their philanthropy is both generous and well-planned from a wealth management perspective.

To learn more about donor-advised funds and other tax-advantaged solutions for charitable gifting, contact Illumination Wealth today and speak with one of our seasoned financial advisors.