Donor-advised funds (DAFs) are a type of charitable giving vehicle that allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charitable organizations over time. They have become increasingly popular in recent years as a way for donors to make a significant impact on the causes they care about while also simplifying their charitable giving.
Benefits of a Donor Advised Fund
One of the main benefits of DAFs is their flexibility. Unlike traditional charitable donations, where the money goes directly to the charity, with a DAF, the donor can make a contribution and then take the time to research and recommend grants to the charities of their choice. This allows donors to be strategic in their giving, ensuring that their contributions are going to organizations that align with their values and mission.
Another benefit of DAFs is the tax advantage. When you make a contribution to a DAF, you can take an immediate tax deduction for the full amount of the contribution, regardless of when or if the funds are distributed to charity. If you gift appreciated stock, you are also able to avoid paying capital gains taxes on the growth of the investment as the DAF can sell the position tax free.
This is a great option for donors who want to make a significant charitable contribution but may not have the cash on hand to do so at the time of the donation. Additionally, with only about 10% of taxpayers itemizing their taxes each year bunching multiple years worth of charitable gifts into one year can potentially allow a taxpayer to exceed the standard deduction threshold in a year and receive a larger multi-year tax benefit.
Example: Nigel and Phoebe give $10,000 to charity each year and their other itemized deductions add up to an additional $15,000. In 2023, the standard deduction for a married couple filing jointly is $27,700 meaning their itemized deductions of $25,000 provide them with no tax benefit. They choose to bunch five years of giving into a single year by gifting $50,000 into a DAF. This brings their itemized deductions for 2023 to $65,000 allowing them to save $11,936 if in the 32% tax bracket with no adverse impact on future years tax bills.
Additionally, DAFs can be a great way to simplify charitable giving. Instead of writing multiple checks to different charities, donors can make one contribution to a DAF and then recommend grants to multiple charities over time. This can be particularly helpful for donors who want to support multiple causes but don’t want to keep track of multiple donations and tax receipts.
Example: Nigel and Phoebe gift $1,000 each year to their 10 favorite charities. In order to track their giving and provide proof of the gifts to their CPA they must track down gift letters from each charity they give to. By gifting to a DAF and then making grants from there, they only need to track down the gift letter that their DAF provides.
DAFs are also great for donors who want to involve their family in their charitable giving. Many DAFs allow multiple family members to be involved in the grantmaking process, making it a great way to teach the next generation about philanthropy and the importance of giving back.
We have created a family statement of purpose worksheet that families can complete with their children and other loved ones to define the purpose and mission behind their giving and create family alignment around the intent and goal of the charitable funds they have.
Overall, donor-advised funds are a great option for donors who want to make a significant charitable impact, simplify their giving, and enjoy the benefits of an immediate tax deduction. It’s worth considering for anyone looking to make a meaningful and strategic charitable contribution.
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