When tax time rolls around, most people aren't thinking about why certain tax credits exist. They...
Maximizing your charitable giving through donor advised funds
If you find yourself feeling particularly philanthropic but are not quite sure where you'd like to give your money, you can still get an immediate tax benefit for those donations through the use of a donor advised fund (DAF).
What is a donor advised fund (DAF)?
A donor advised fund is an account that allows you to make a donation, receive an immediate tax benefit in the year of the donation, and determine how to distribute those funds to qualifying charitable organizations at a later date. Consider a DAF a charitable investment account for the sole purpose of funding organizations you want to support. Because it is an investment account, you also get the benefit of tax-free growth of your account that can be designated to the organizations of your choosing.
Benefits of a DAF
- Ease: Because DAFs function much like investment accounts, they are extremely easy to set up. Find a sponsoring organization, fill out the necessary information, contribute the minimum initial contribution, and you're on your way.
- Flexibility: DAFs allow you to take an immediate tax benefit and transfer those funds to charitable organizations in the future. Therefore, if you're not sure what organizations you would like to give to, you are not in a rush. You don't have to give it to one organization and you don't have to give it all at one time.
- Privacy: Sometimes, you want to be able to give money away without everyone knowing you're giving money away. A DAF affords you the opportunity to do just that. The sponsoring organization does not have to reveal you as a donor and it can make grants to each charity you decide anonymously.
- Taxes: There are a few tax benefits. The first and most immediate is the income tax savings you get due to the deductibility of charitable contributions. If you're donating appreciated assets (e.g., stocks), the DAF does not incur capital gains tax. In addition, balances in your DAF are not included in your estate for the purposes of estate tax.
Costs of a DAF
- Management Fees: Because the DAF operates as an investment fund, there is going to be a management fee associated with it.
- Emphasis on the Advised: When you contribute to your DAF, you are making an irrevocable gift to the sponsoring organization. Though most sponsoring organizations will honor your desire to donate to the public charity of your choice, there is always the chance your request is denied.
Donor advised funds are great when you want to take an immediate tax deduction but spread out the distribution of your charitable gifts. DAFs are extremely accessible for the majority of individuals and families and are great way to ensure you are able to fund causes you believe in for years to come.