Philanthropic Planning: The Benefits of Donor-Advised Funds (DAFs)
We are continuing our year-end article series focused on charitable giving and philanthropic tax planning. The proper strategies can enable you to make a bigger difference through charitable donations, while also benefitting you from a tax perspective. Check out our previous articles in the series:
- A Comprehensive Guide to Charitable Giving Strategies
- Maximize Capital Gains by Gifting Appreciated Stock
What is a Donor-Advised Fund (DAF)?
Today, we want to discuss the gifting and tax benefits of using a donor-advised fund (DAF). This can be a simple and flexible strategy for charitable giving. DAFs are becoming more and more common with philanthropists and charities because they are a relatively easy way to donate while providing the donor with strong tax advantages.
It starts with establishing a Giving Account or working through an existing donor-advised fund. Then, you can donate cash, appreciated securities, private company stocks, cryptocurrency or more. The donor is eligible for an immediate tax deduction. The funds are held in an investment account that can potentially grow as you decide which charities to support. This makes it possible to donate even more money over time as the fund grows, while any those gains are tax-sheltered because they are all eventually going to charity. You can contribute as much as you want to a DAF, but the funds are irrevocable. You cannot cash out any for yourself once the donations are in the fund.
Donor-Advised Fund Benefits
There are three primary benefits of charitable giving through a donor-advised fund:
- Supporting the Charities You Want—Virtually any public charity can be supported through a DAF. The “donor-advised” title is important because you have control over where your funds are distributed.
- More Giving Potential—Because the funds are held in an investment account, there is good opportunity for them to grow in value. Thus, you can ultimately give more to your favorite charities.
- Tax Deductions—You can claim an immediate tax deduction for any cash or assets you donate to the DAF. This will reduce your taxable income and may provide you with significant tax savings.
Starting a Donor-Advised Fund
Is a DAF the right charitable giving strategy for you? It may not be the best solution for everyone, but this approach is growing in popularity for a reason. It is a simple fund to establish and provides several key benefits.
To learn more about donor-advised funds and for help managing your charitable giving, tax planning and overall wealth management plan, contact Illumination Wealth today.