Donor Advised Funds: A Flexible Tool for Modern Philanthropy
Donor advised funds (DAFs) offer a streamlined, flexible way for individuals and families to manage their charitable giving. This tool allows a giving plan to evolve over time while the assets continue to grow. Depending on the DAF provider, there may also be benefits in due diligence and monitoring, alongside the tax advantages of charitable giving.
What is a Donor Advised Fund?
Think of a DAF as a charitable savings account. It’s a separate account held by a sponsor, which can be a public charity, community organization, or financial services company. The account is owned by the charity for the benefit of the donor. It can be invested in various financial instruments like stocks, bonds, and mutual funds. A financial advisor can oversee the account, setting the asset allocation and selecting investments according to the donor’s wishes. This means the account can support the donor’s philanthropic goals while being invested according to their values.
The Tax Benefits
Donors can contribute cash, securities, or other assets, and the assets in the account grow tax-free. The DAF simplifies record-keeping for tax purposes since you only need to track the DAF contribution, not each individual donation. The tax deduction is taken when the funds are contributed to the DAF, not when they are granted out.
DAFs also help manage capital gains taxes on appreciated assets. Taxes are avoided when the asset is contributed to the DAF, and the tax deduction is based on the fair market value of the asset at the time of donation.
The Benefits of Flexibility
Since the account is ongoing, charitable giving can occur annually and accommodate life events like an inheritance or asset sale. This removes the need to make quick decisions while preserving the tax benefit for the years that make the most sense for the overall financial plan. You can take the deduction in the year you contribute to the DAF, not when the gift is made to the ultimate receiver.
A DAF streamlines giving by separating the grant decision-making process from the decision on the amount and timing of the charitable donation. Making the donation becomes a simple administrative part of your financial plan that your advisor can handle in the most tax-efficient way, according to your needs and long-term goals.
The decision-making process can be a separate event, included in family meetings, estate planning discussions, or annual giving around holidays or meaningful events. It can also be helpful in times of crisis when quick action is needed, such as natural disasters. Simply log into your account and recommend a grant.
Making an Impact
A DAF allows time to develop a strategic giving plan that considers the overall impact of the grant and the health of the charity. Making a series of annual gifts to support an initiative can create a funding stream that generates a partnership with the charity for a specific purpose. Since the funds are already in the DAF, the charity benefits from ongoing funding rather than one large gift. For the donor, the multi-year aspect of giving can be the foundation of a family legacy that continues for future generations. The funds have the opportunity to grow over time in the DAF, while the family evolves their giving plans and the charity achieves milestones along its mission.
Reducing the Administrative Burden
The DAF sponsor is responsible for vetting the qualified charities recommended by donors, which can help remove some of the burden from the donor. However, it’s important for donors to select a sponsor that aligns with their values and goals and offers a level of service and participation that matches their needs.
Keeping it Private
For some donors, privacy is a priority. DAFs allow for charitable donations to be made without publicly disclosing the donor’s identity. This can help limit unwanted solicitations and provide confidentiality for some aspects of a philanthropic giving plan.
The Limitations
The DAF structure allows donors to recommend grants to specific charities, but the DAF sponsor ultimately approves or denies the request. This means the donor relinquishes direct control over the assets. Therefore, it’s crucial to pick a sponsor that aligns with the donor’s charitable vision and goals.
The Bottom Line
A donor advised fund can be a flexible tool in a financial plan that features charitable giving as an ongoing, important piece. There are many benefits and some limitations, but working with a financial advisor can help you determine if a DAF should be part of your plan.
Ready to explore how a DAF can fit into your wealth strategy? Schedule a complementary consultation to get started on your philanthropic journey!
This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.