If charitable giving is important to you, consider a donor-advised fund (DAF). A DAF — typically sponsored and managed by a community foundation or commercial investment company — offers many of the benefits of a private foundation at a fraction of the cost.
Upsides of a DAF
A DAF allows you to make tax-deductible contributions to an investment account and to advise the fund regarding which charities your contributions and earnings should be used to support. Tax regulations require the sponsor to have the final say on how your charitable dollars are spent, but in most cases the fund will follow your recommendations.
The advantages of a DAF include:
Immediate charitable deductions. The ability to set up a DAF quickly and secure an immediate charitable income tax deduction, without the need to identify a specific charitable beneficiary, is attractive to many donors. Why does this matter? Perhaps this is an ideal year for you — from a tax perspective — to make significant charitable donations, but you haven’t determined which charities you want to support.
Simplicity and low cost. Setting up a DAF is almost as straightforward and inexpensive as starting a mutual fund account. Minimum contributions vary to open up an account with a typical average of around $25,000, with some permitting you to begin with $5,000.
Private foundations, on the other hand, usually involve six- or seven-figure contributions, take several months to set up, and come with significant legal fees and other expenses. And while a DAF’s sponsor handles investment management and administration, a private foundation requires you to establish a board, hold periodic board meetings, keep meeting minutes, and file tax returns.
Higher deduction limits. Cash contributions to DAFs, like donations to other public charities, are deductible up to 60% of your adjusted gross income (AGI). Noncash contributions are deductible up to 30% of AGI. Deduction limits for private foundations are 30% and 20%, respectively.
Privacy. Unlike private foundations and other charitable giving vehicles, a DAF allows you to remain anonymous if you so desire. Technically, when a DAF sponsor donates to a charity, it’s distributing its own assets, so you can elect to keep your name out of it. Alternatively, you can name your DAF after your mission — for example, the Fund for Alzheimer’s Research.
Downsides of a DAF
Once you contribute assets to a DAF, they become the sponsor’s property. Your role in directing distributions is, as the name indicates, strictly advisory, and you have little or no control over investment management.
Next Steps
Whether a DAF is right for you depends on how much you plan to give to charity, the amount of time and resources you wish to commit to philanthropic activities, your need to retain control over your charitable assets, and other estate planning objectives.
Please note: The charitable deduction is available to taxpayers who itemize deductions. To be eligible for a tax deduction in a given tax year, contributions to a donor-advised fund (DAF) must be completed by December 31. However, some assets, especially non-cash assets, can take longer to process. To ensure the contribution process is complete by the end of the year, some organizations provide earlier deadlines by asset type. Assets may include real estate, stocks, bonds, and mutual funds, which require more due diligence and processing. In addition, processing times can be longer due to spikes in volume at the end of the year. Lastly, you must establish and open your DAF account before submitting contributions or recommending grants.
“Unlock significant tax advantages with a Donor-Advised Fund (DAF): take advantage of immediate deductions and higher contribution limits while simplifying your charitable giving process.”
– Jeff Rislov, CPA and Partner
Let us exceed your expectations. Contact one of CDS Experts at (888) 388-1040 to help you evaluate the relative costs and benefits to determine if a DAF is right for you and how to proceed before the end of the year to be eligible for a tax deduction in 2024.
