Donor Advised Funds (DAFs) have gained popularity in recent years as an effective tool for charitable giving. DAFs offer immediate tax benefits, as donations to a DAF provide a tax deduction in the year they are gifted. These funds offer an incredibly flexible way to craft a charitable gifting strategy that allows for the gift to be invested for growth potential over time, and for the donor to maintain control over the assets.
Understanding Donor Advised Funds
A Donor Advised Fund is a tax-efficient savings vehicle that allows donors to make charitable donations while retaining control over where and when those donations are distributed. Donations to DAFs can include cash, stocks, bonds, bitcoin, and private company stock. To qualify for tax benefits, the fund administrator must be a public charity that falls under the qualifications of a 501(c)(3) organization.
How They’re Managed and How to Contribute to One
To open a DAF, donors must first select a qualifying sponsor and make an irrevocable contribution to the fund. At that time, they can take an immediate tax deduction and begin naming beneficiaries and successors for the account. After contributing, the sponsor firm then has legal control over the funds. It can invest the money in accordance with the donor’s recommendations until the donor is ready to decide which charity to distribute the funds. Administrative fees associated with DAFs should be considered, as these fees are deducted from the donor’s contributions.
When Does It Make Sense to Contribute to a Donor Advised Fund?
Contributing to a DAF can make sense for those who own highly appreciated assets, are seeking tax-deductible transactions, or want to make a sizable future donation. It is important to note that the donor receives an immediate tax deduction on the amount contributed, even if the funds are not distributed to a charity until a future date.
The Pros and Cons of Donor Advised Funds
One of the most significant advantages of DAFs is the flexibility they offer in crafting a charitable gifting strategy. DAFs simplify record keeping by acting as a hub for all donations and providing a single tax document containing all relevant information. However, DAFs are not without their drawbacks. Donors must consider the fees associated with DAFs, which include administrative fees and fees associated with the underlying investments. In addition, donations are irrevocable.
The Takeaway
Donor Advised Funds are a versatile tool when it comes to making charitable donations. They provide tax benefits and allow donors to choose where their money goes, all while those donations can grow tax-free until a charity is chosen. However, it is essential to consider fees and consult with a financial advisor, legal professional or tax professional before establishing a DAF to ensure that it is an appropriate charitable giving strategy for you and for your individual financial situation.
Donors must itemize deductions to receive a charitable income tax deduction. Charitable giving can result in tax, legal and financial consequences. Christopher Clepp does not provide legal, accounting or tax advice.
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