Want to Give to Charities? Consider a Donor-Advised Fund!
What is a Donor-Advised Fund?
A Donor-Advised Fund (DAF) is a charitable investment account that is established to support the nonprofit organizations you care about. These accounts can be opened through major financial institutions such as Charles Schwab, Fidelity, and others.
How Does a Donor-Advised Fund Work?
Step 1: Contribute to the DAF
You can contribute cash, appreciated assets, or securities from an investment account.
These contributions are irrevocable and are immediately eligible for a charitable tax deduction, subject to IRS limits.
Step 2: Invest and Grow
Depending on the sponsoring organization, you’ll have access to a variety of investment options within your DAF.
The contributions can be invested in one or more of these funds, potentially allowing your donation to grow over time.
Tip: Your investment choices should align with your timeline for making grants to charitable organizations.
Step 3: Recommend Grants to Charities
You can recommend grants from your DAF to IRS-qualified 501(c)(3) public charities.
You have flexibility to support multiple organizations, make one-time or recurring grants, and choose the timing of each distribution.
Tax Advantages of a Donor-Advised Fund
1. Immediate Tax Deduction
Contributions are generally eligible for an immediate tax deduction.
For example, a $25,000 donation may be entirely deductible in the year it is made, subject to your Adjusted Gross Income (AGI) and IRS guidelines. If not eligible for a full deduction, the unused deduction is carried forward to future tax years.
2. Tax-Free Growth
Investment gains within the DAF grow tax-free, which may increase the amount available to grant to charities over time.
Frequently Asked Questions
Q: Can I leave a balance in the account at year-end?
Yes! Funds can remain in your DAF until you are ready to make grant recommendations. There is no deadline requiring you to disburse funds within a specific time frame.
Q: What happens to my DAF if I pass away?
You can name a successor to continue making grants from your DAF, or you may designate specific charities to receive the remaining balance as final beneficiaries.
Q: Can I remove a contribution from my DAF?
No. Contributions to a DAF are considered irrevocable gifts by the IRS, meaning you cannot withdraw or reclaim them once they are made.
Final Thoughts
Donor-Advised Funds are a powerful tool for individuals and families who wish to support the causes that matter most to them while also receiving potential tax benefits.
At Pay It Forward Financial Planning, we help clients incorporate charitable giving into their broader financial plan in a thoughtful and tax-efficient way. If charitable giving is important to you, and you’re wondering whether a Donor-Advised Fund is right for your situation, please reach out to me at matthew@payitforwardfp.com.
Let’s work together to make a lasting impact!
Disclaimer: The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Pay It Forward Financial Planning, an investment adviser registered with the state of Ohio.