If you’re charitably inclined, you’re probably interested in maximizing your contribution to your favorite organizations while also maximizing your tax benefit. A Donor Advised Fund (DAF) can help you get there.
What is a Donor Advised Fund?
In simple terms, a DAF is an investment account for charitable giving purposes. You contribute as often as you want, get an immediate tax deduction for your contribution, leave the money in the fund to be invested/potentially grow, and you get to recommend grants from your account to qualified charities when you want.
Generally speaking, a DAF is easier and cheaper to set up and administer than a foundation, more flexible than direct contributions to charities, and more tax advantageous than either.
Donor Advised Funds are Growing in Popularity
- With the Tax Cuts and Jobs Act of 2017, and the corresponding limit to the state and local tax deduction, many find their itemized deductions are less than the standard deduction. This means more people are taking the standard deduction rather than itemizing and are there for not getting a tax benefit for their charitable giving. DAFs allow you to "bunch" several years' worth of charitable deductions into one year so they can be itemized.
- Although there will be exceptions to the rule, DAF startup costs are generally slim and setup is immediate. Different custodians have different minimum requirements for opening a DAF so look for one that fits your needs.
- Names of individual donors to a DAF can be kept confidential. Foundations must file detailed and public tax returns, including the names of contributors who donate $5,000 or more during one taxable year.
- Using a DAF allows you to take the tax deduction when it's most beneficial for you, and put off the gift to the charity to allow the capital to grow further. Again, this can be particularly helpful for those looking to itemize under new tax laws.
There are Different Types of Sponsoring Organizations
- National organizations: National organizations, like some financial services firms and brokerages, tend to be neutral on issues and geography, offer superior technology, more sophisticated investment options and free calculators. They're typically better at dealing with non-cash, complex or unusual gifts, and they may be up to 40% cheaper.
- Community organizations: There are hundreds of community and faith-based organizations that sponsor DAFs. You may want to choose this option if you're looking for local expertise, due diligence on small charities and educational on opportunities on charitable giving in your community.
- Public foundations, hospitals, universities, etc.: Many of these have DAFs within their foundations. You may choose one of these if you're interested in helping them advance their specific charitable mission.
Finally, here are some important things to remember about your DAF:
That “A” stands for “Advised.” You don’t get an absolute say on where your money goes, so make sure your charity is eligible to receive contributions from a DAF, and that you trust your DAF to reflect your interests.
Research minimum contributions and account balances, investment options, fee and payment schedules, access to professional expertise and ability to transfer your account before you make your choice. Philanthropic best practices should apply.
Of course, you should always talk with your advisor about how any charitable contribution, through a DAF or otherwise, fits in with your overall financial plan before making any decision.
This is for information purposes only and is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
CFP®, Insurance License Nicole leads our national wealth management teams focusing on high-net-worth families with complex needs. In her 15+ years working in the financial services industry her asset management focus has led her to spend time in the institutional and family office sides of our business. Her depth of experience across business arms helps her Unifi investment strategies within a comprehensive tax and estate plan. Nicole gives her clients confidence they truly...Read More