+1 361-233-0080

A donor-advised fund, or DAF, is a charitable giving program that allows donors to make a tax-deductible contribution to a public charity and then recommend grants from the fund to other qualified charities.

An individual, family, or organization can create a donor-advised fund, a private fund administered by a third party, to manage their charitable donations. There are numerous benefits to using a DAF, including the ability to make a significant impact with your donation, the convenience of donating and managing your funds, and the potential for tax savings.

This is why in the last three years, DAF grants to qualified charities have risen by over 60%, which builds upon the positive ten-year trajectory. In fact, they have increased by over 400% in the last decade.

Here, we’ll discuss everything you need to know about donor-advised funds, their benefits, and some tips to help you get started. From tax advantages to providing flexibility, find out why donor-advised funds are becoming increasingly popular in recent years.

How Does DAF Work?

By setting up a DAF, you can donate cash, securities, and other assets to a registered 501(c)(3) organization. All of the contributions are placed into a fund in your name, held by the DAF sponsor, and eventually given to the charity of your choice.

Moreover, contributions to a DAF are eligible for immediate tax deductions, meaning you can save money in the present even if the funds are only going to be distributed to charities at a later date.

Donors can recommend grants to qualified nonprofits anytime, and the grant recommendations are subject to the public charity’s review. The public charity is responsible for due diligence and grant-making decisions. The donor can also appoint a successor, such as a family member, to make grant recommendations after their death.

Advantages of Donor-Advised Funds

Get High Tax Benefits

Donor-advised funds come with several tax benefits. Cash contributions are eligible for tax deductions of up to 60% of adjusted gross income (AGI), while appreciated securities can qualify for deductions up to 30% of AGI. Transferring assets, such as limited partnership interests, to donor-advised funds can also provide a range of benefits, including avoiding capital gains taxes and claiming immediate fair market value tax deductions.

Donations of cash, stocks, or non-publicly traded assets such as private business interests and cryptocurrency can become tax-deductible if you contribute to a donor-advised fund. Please note, however, that this is an irrevocable commitment to charity. The funds cannot be returned to you or any other individual or used for any purpose other than to grant to charities.

Maximize Tax Benefits

Some donations may offer you even more significant benefits. Donating assets that have been appreciated over a long term can be a great way to maximize your tax advantages and the amount you can give to charity.

Not only does it maximize the amount you grant to charity, but it also provides two tax benefits. Firstly, you are eligible for an income tax deduction of the total fair market value of the asset, up to 30 percent of your adjusted gross income. Additionally, if the asset has been held for more than a year, it eliminates the capital gains tax that would otherwise be due.

Time Your Charitable Contributions

You can also use donor-advised funds to time your charitable contributions and maximize your tax deductions. For example, if you donate $25,000 to charity each year, you could put $100,000 in a donor-advised fund now and then have the fund disburse $25,000 a year to the charity for the next four years. This would give you a $100,000 tax deduction this year, whereas if you had made the donations in the four subsequent years, you would have received a $25,000 deduction each year.

Streamline Your Charitable Donations

Donor-advised funds (DAF) are a great way to streamline your charitable donations. DAFs give you the flexibility to make donations when it’s convenient for you. You also get to experience the ease of having one account to manage all of your donations.

You will only need to keep track of the receipts from your DAF contributions and not the gift acknowledgments from each charity you support. When you’re ready to donate, you can log in to your account and recommend a grant to any IRS-qualified public charity. This allows you to make charitable giving more manageable and organized.

Continue the Legacy

You can make a bequest to your DAF sponsor or make them a beneficiary of a retirement plan, life insurance policy, or charitable trust. This helps reduce or eliminate the estate tax burden for your heirs, and you can also create a succession plan that allows you to pass the remaining funds in your account on to your heirs or favorite charities. With many sponsoring organizations offering customized succession plans, donor-advised funds can be an invaluable part of a legacy planning strategy.

Do Charity Your Way

A donor-advised fund allows you to make grant recommendations to almost any public charity the IRS approves. This could be anything from a homeless shelter close to you to your university or religious organization. The public charity managing your account will assess your charity recommendation to ensure that the money is going to a public charity authorized by the IRS and is being used for a charitable cause.

Donor-Advised Funds are a great way to give back to your community while also taking advantage of the tax benefits that come with them. They allow you to support your favorite causes while enjoying the convenience and flexibility of a professionally managed account. You can also invest in various assets, including stocks, bonds, mutual funds, and other investments. The best part is that your donations can have a lasting impact on the causes you care about.

If you’re looking for a team of experienced professionals to help you navigate the complexities of personal finance and tailor a retirement plan to meet your unique needs, reach out to South Star Wealth Management today. We are here to help you turn your financial goals into a reality. A disclosure: For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Investment Services LLC nor any of its representatives may give legal or tax advice.