Participating in year-end meetings typically leads to discussions regarding charitable donations. The donor-advised fund (DAF) has become increasingly popular over the last several years with the possibility to provide advantages in tax strategies and payout flexibility. This is a charitable investment fund in the donor’s name that can hold cash or securities to be distributed at a later time (not necessarily in the year of the charitable contribution). While most people give directly to their charities of choice, it might be sensible to utilize the DAF in certain scenarios.
When does the DAF make sense?
High Income Years/Large Donations
During years when the household income might be higher than expected one would anticipate a higher tax burden. The DAF would allow someone to front-load charitable donations in the calendar year of high income in order to increase the charitable deduction. They still have control over distributions to non-profit organizations in the future. Also, if they’re planning to make a large donation (over $10,000) or aren’t sure who to give it to right away – a donor-advised fund may be a good option.
Donating Appreciated Securities
The donor-advised fund is able to accept donations of stock, which may not be the case for a favorite local charity. This helps maximize your gift as the amount will not be reduced by taxes paid on capital gains if the stock were to be sold and then cash contributed to the charity.
Simplify Giving to Multiple Organizations
A contribution to a DAF is summarized in one statement and you receive one deduction for this amount regardless of how many grants you make from the fund itself. This administrative convenience could be helpful when preparing the tax return.
There are a few drawbacks including certain account fees and ceding control of those assets for personal use, but the benefits could outweigh any limitation.
Let us know if you’d like to discuss your charitable giving strategy with us,
Matt and Andrew