A Shrewd Way to Give: The Donor-Advised Fund
Here’s how it works:
- You make an irrevocable contribution from your personal assets.
- You immediately receive the maximum tax deduction that the Internal Revenue Service allows.
- You name your donor-advised fund account, advisors and any successors or charitable beneficiaries.
- Your contribution is invested in the donor-advised fund account and grows tax-free.
- You can recommend grants from your account to qualified charities at any time you choose. And you can do so anonymously — the general public will not know who is making the donation.
Though created in the 1930s, the legal structure for DAFs wasn’t established until 1969, and only since the 1990s have these vehicles really caught on, growing in visibility and popularity. In fact, in recent years, they’ve become philanthropy’s fastest-growing vehicle, with more than 3 percent of all charitable giving in the U.S. in DAFs.
Donor-advised funds offer advantageous tax deductions: up to 50 percent of adjusted gross income for gifts of cash and up to 30 percent of adjusted gross income for gifts of appreciated securities, mutual funds, real estate and other assets. There is a five-year carry-forward deduction on gifts that exceed adjusted gross income limits.
You will find that DAFs offer a tax advantage when you contribute specific assets, like long-term appreciated stock. By donating appreciated stock held for more than one year, you can avoid or reduce capital gains taxes. The idea is that you will be able to give more to charity and pay less in taxes.
How do you start? You will generally need to make a contribution of $25,000 or more, although some funds have lower minimums. Once your account is established, you can make subsequent contributions of $5,000 or more—again, this may vary. You can name your donor-advised fund account any name you choose. Many people give it a name that reflects the main purpose of the account, like “The Smith Education Fund,” if it’s dedicated to educational charities, for example. Typically, your DAF contributions can support any 501(c)(3) entity, as long as the donor does not personally benefit. DAFs can also fit into your estate plan, to make sure your charitable plans continue after you’re gone.
There are additional rules and exceptions, but we hope this brief introduction may have whetted your appetite for learning more. Our office is open to help you work with a donor-advised fund today and obtain the maximum tax deduction possible.
Would you like to consider using a DAF for your philanthropic plans? Give us a call, and we’ll walk you through the details.