Donor-Advised Fund (DAF) is a charitable account where you can contribute cash, stock, real estate, and other assets. Assets in a donor- advised fund grow tax free and can be used to make donations to any IRS-qualified public charity. There are tax advantages for donating to a donor-advised fund.
How donor-advised funds work
- Donor selects a sponsor and makes contributions in cash, stock, or other assets.
- Donor gets a tax deduction
- The contributions are invested according to the donor’s preferences. The money grows tax-free.
- Donor recommends to the sponsor the charities he or she would like to donate. The sponsor then writes a check to the charity.
Donor controls how money is invested and distributed
A donor-advised fund is owned by the sponsoring charity, but as a donor, you have control over how the money is invested and distributed.
Irrevocable contributions
Any contribution you make to a donor-advised fund is irrevocable. This means that the funds cannot be returned to the donor and can only be used to make contributions to qualifying charities.
Tax deduction
When you contribute assets to a donor-advised fund, you can claim an itemized tax deduction for federal and state taxes. Your tax deduction will depend on the type of asset and how long you have held your assets. Tax deductions are limited to 30% of adjusted gross income (AGI) for con-cash assets held more than one year or 60% of AGI for contributions of cash. Donations exceeding these limits can be carried up to five years.
Donate appreciated assets
You can donate appreciated stocks or other assets and get a tax deduction for the market value of the donation. This is more tax efficient than selling your assets, paying capital gains taxes, and donating cash to a charity.
Let’s take a look at an example. You have $50,000 in appreciated stocks that you would like to contribute to charity. Your cost basis for the stocks is $10,000. Let’s assume that you are in the 35% tax bracket and the capital gains tax rate is 15%.
Option 1: Contribute cash- You sell the stocks for $50,000. You pay 15% taxes on the gain of $40,000 (Tax = $40,000 *0.15 = $6000). Your tax saving is $11,500 (35% of $50,000 minus capital gains tax of $6000)
Option 2: Contribute appreciated securities – You donate $500,000 in appreciated securities. Tax saving is 35% of $17,500.
No minimum contribution
DAFs have no minimum contribution, but the sponsors can set their account minimums. Account minimums can be as low as $5,000.
Understand the cost
When you invested in a DAF, you will pay administrative fees and investment expenses. Take a close look at the fees before you invest because combined fees can add up to almost 1% of the assets per year in some cases. In addition, some DAF offer advisory services through a financial advisor for a cost. The financial advisor will help you choose investments to meet your long-term goals.
Legacy Planning
By making a bequest in your will, you can make the sponsor of the donor-advised fund a beneficiary of your retirement plan or life insurance policy. This will reduce real estate tax for your heirs and allow you to support multiple charities with one bequest.
Estate planning
Assets contributed to a donor-advised fund are considered part of a person’s estate since the assets belong to the sponsor. This allows you to reduce your real estate taxes. DAFs are a great way to direct where your money is invested and to what charitable organization your money goes.
Bottom Line
Donor-Advised Fund is a great way to give money to charitable organizations. You can contribute cash, appreciated stock or other assets and get significant tax benefits. DAFs allow you retain control of how your money is invested and to what charitable organization your money goes.