Financial Advisors: What is a donor-advised fund?
Your intentions are commendable, but there could be room for improvement in your approach.
Charitable giving is highly valued by Americans, with approximately 69% of the population regularly contributing to organizations they deeply care about. Many people donate inefficiently or miss out on maximizing the impact of their generosity by giving away cash.
Nowadays, kind people are using donor-advised funds to help charities and get tax benefits at the same time.
Donors can use donor-advised funds to grow and allocate their charitable resources. They can also receive tax benefits at the end of the year.
What is a Donor-Advised Fund?
Selecting a cause to support requires careful contemplation, which can be time-consuming. A donor-advised fund (DAF) allows you to save money for charity without immediately choosing a specific cause. DAF sponsors let you save money and get tax benefits right away. You can decide which charities to support later.
In essence, donor-advised funds (DAFs) operate like investment accounts tailored to charitable giving. These funds accept various assets, including cash, stocks, cryptocurrencies, real estate, fine art, and other valuable holdings.
A donor-advised fund account allows you to give money to charities over a long period of time. It also allows your donated money to grow. Instead of giving a large amount of money at once or occasionally, you can continue giving through this account.
This approach enables you to have an even more substantial impact on the charitable organizations that matter most to you. With a donor-advised fund, you can make a big impact by supporting causes you care about in a strategic way.
How it works
When you give money to a DAF organization, it is used for charity and cannot be taken back for personal use. You can invest money in your account without paying taxes, like an investment account, to increase your charitable donations.
You have the freedom to decide how your money is invested with a DAF. Additionally, you can choose when and how much you want to donate to specific charities. This level of involvement allows you to have a direct and meaningful impact on the causes you support.
Advantages of Donor-Advised Fund
Donations to donor-advised funds increased from $8.13 billion in 2011 to $34.67 billion in 2020. This is due to various reasons, making it a popular choice for giving.
Immediate Tax Deduction: Even if you haven't chosen a specific charity to donate to, you can claim a tax deduction right away.
Simplified Giving: Donor-advised funds provide one central place and receipt for all your charitable contributions.
Growth Potential: By investing charitable dollars, you have the opportunity to donate more over time than if you gave cash directly to your favorite charity.
Diverse Donations: Donor-advised funds accept various assets like stocks and cryptocurrency, allowing you to support any charity, as not all organizations directly accept non-cash assets.
Tax Benefits: Contributions to your donor-advised fund grow tax-free, and you can avoid capital gains taxes on the assets you contribute.
Flexible Deductions: Cash contributions can provide a tax deduction of up to 60% of your adjusted gross income, while non-cash assets offer up to 30% deduction.
Accessibility: Unlike private foundations, starting a donor-advised fund doesn't require immense wealth, and operational costs are lower.
Increased Asset Value Deduction: You can claim a tax benefit based on the current value of assets contributed, even if they have appreciated in value since acquisition.
Anonymous Giving: Donor-advised funds allow you to maintain anonymity, providing the option to make anonymous grants to charities if desired.
Disadvantages of Donor-Advised Fund
Regulators and critics have questioned the motives of people who use donor-advised funds for giving. The concern revolves around whether individuals are genuinely committed to charitable causes or primarily seeking advantageous tax benefits.
One reason for these worries is that periodic grants are not mandatory, unlike the rules for private foundations. However, it's worth noting that donor-advised funds do exhibit a higher payout rate to charities compared to private foundations.
In 2020, donors contributed an impressive sum of over $48.7 billion to DAFs, and a substantial portion of that amount ($34.6 billion) was granted to charitable organizations during the same year, as revealed in a report by the National Philanthropic Trust.
Another point of contention is the element of control. When money is put in a DAF, it is no longer owned by the donor.
The DAF sponsor can refuse some grant requests. Grant denials are rare and usually happen only for specific legal reasons. In most cases, funds are efficiently transferred on the very same day as requested grants.
How to open a DAF
One of the outstanding features of donor-advised funds is their remarkable ease of initiation. Starting your fund is easy. Just choose the right DAF sponsor to help manage and distribute your contributions.
Choosing a sponsor
Your DAF sponsor affects how your fund is invested and how your contributions are given to charities. Various sponsoring organizations cater to different audiences, ranging from the ultra-wealthy to those focused on specific issues.
When selecting a sponsor, it's essential to consider a few key factors:
Minimum Contributions: Some DAF sponsors may require substantial minimum contributions to open an account.
Investment and Administrative Fees: DAFs generate revenue through administrative fees, which can vary significantly among different sponsors.
Investment Options: Assess the available investment options and ensure they align with your personal investment philosophy.
Values and Grant Policies: Certain donor-advised funds might limit the supported charities based on their stated values or grant policies. Verify that your chosen DAF's policies align sufficiently with your own values.
You have the freedom to select from a diverse range of exchange-traded funds and managed portfolios of growth stocks. This option lets your donations grow without taxes, making them more effective in supporting the causes you care about.
How much can you contribute?
You can donate money or assets to a donor-advised fund. However, there are limits on the tax benefits you can receive from these contributions.
You can avail tax deductions up to 60% of your adjusted gross income (AGI) for monetary donations. For non-monetary donations, the tax deduction can be up to 30% of your AGI.
Are Donor-Advised Funds Taxable?
Indeed, one of the notable advantages is the ability to claim an immediate tax deduction on your contributions. You can deduct 60% of your income for cash contributions and 30% for non-cash assets. This tax benefit provides an added incentive to support charitable causes through donor-advised funds.
What happens to DAF when you die?
Donor-advised funds (DAFs) are not considered part of your estate from a legal standpoint. The funds held within the DAF belong to the DAF sponsor. Therefore, in the event of your passing without informing the DAF sponsor about your succession plans, the funds in your account might be endowed to the DAF sponsor managing your fund.
However, there is a solution to safeguard your charitable giving legacy. Many DAFs offer the option to designate "beneficiaries" for your DAF account. By assigning beneficiaries, you can provide instructions on how to allocate your DAF's funds upon your passing. This makes sure your donations keep going as you want and lets your charitable impact continue after you die.
Bottom Line
Donor-advised funds (DAFs) serve as a versatile and impactful tool for charitable giving. They offer individuals the opportunity to contribute funds and assets to support their favorite causes while enjoying immediate tax benefits. DAFs allow donors to increase their donations, invest without paying taxes, and give to various charitable organizations.
People can choose DAF sponsors that match their values and name beneficiaries, so their charitable legacy can continue. Overall, donor-advised funds empower philanthropists to make a lasting difference and positively impact the causes they deeply care about.
Sources:
https://www.nptrust.org/what-is-a-donor-advised-fund/
https://www.investopedia.com/terms/d/donoradvisedfund.asp
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