Donor Advised Funds (DAF) - A Powerful Way to Cut Taxes,
Regardless of Your Financial Standing or Tax Bracket
I’m beginning this article with the assumption that you’re already giving or that you would like to incorporate giving as an important part of your life and legacy (see Tax Planning Overview of My Website). So, if Philanthropy is part of your financial plan, you should take advantage of ways to maximize the impact of your gifts. An important way to do this is to take advantage of available tax saving strategies.
DAFs can be a very powerful way to maximize giving and minimize taxes. Even though they might be beneficial in a number of scenarios and with people in the so-called “middle-class” as well as the wealthy, I’ve found that most people have never heard of them.
A DAF is like a charitable investment account established for the sole purpose of supporting the charities that are important to you. They don’t require legal paperwork, are simple to establish, and require relatively low minimum investment amounts.
The following simple diagram outlines how they work.
*Note that one of the great benefits is that in addition to cash, you can contribute such assets as stocks, mutual funds, real estate, annuities, C or S corporation stock, certain restricted securities or privately held stocks, etc.
There are multiple tax advantages when establishing a DAF.
Immediate tax deduction in the year of contributions (even though you can direct actual gifts from the fund over an extended period of time. This may enable you to itemize deductions versus being limited to the standard deduction.
No capital gains taxes on gifts of appreciated assets that you’ve held for more than one year.
Control gift tax deductions. You can time larger tax deductions for higher income-earning years.
DAF assets are not part of your taxable estate. Bequests to your DAF account are generally eligible for an unlimited estate tax charitable deduction.
Investments grow tax-free. This could result in additional dollars available for future gifting.
Reduction of alternative minimum tax for tax payers subject to the alternative minimum tax. Making a contribution to a DAF can reduce the impact of the AMT.
Reduction of the tax burden of financial windfalls when you sell a business, receive an inheritance, experience strong market returns, or otherwise experience a financial windfall, there could be substantial tax consequences. Donating a portion of the windfall at the right time could allow you to pre-fund many years to your favorite causes while significantly reducing your taxes in the year the windfall was received.
They are a great way to involve the whole family and pass along this important legacy (see Establishing A Legacy of Family Giving). Your DAF can be continued by whoever you appoint as your successor.
You can establish them so that you receive recognition for your gifts or you can give anonymously.
Note that the DAF can be used in conjunction with other gifting and tax strategies. For more information see Donor Advised Funds on our website.
Be sure to discuss the use of the DAF with your personal tax or legal professional prior to implementation. Also, feel free to contact me for more information, to find out if they make sense for you, or if you’d like to establish a DAF.