Embracing the Impact of Donor Advised Funds: A Smart Approach to Tax Efficient Philanthropy
By: Alex Snyder, CFP®, Financial Planner
Donor Advised Funds (DAFs) are a powerful gifting tool that yields significant tax advantages for philanthropic individuals. This charitable vehicle provides immediate tax deductions, flexibility, and the potential for investment growth while supporting charitable causes close to one’s heart.
What exactly is a Donor Advised Fund?
Donor Advised Funds are charitable investment accounts that facilitate gifting of cash, securities, or other assets into a fund that is managed by a trusted institution. Donors receive an immediate tax deduction but keep the freedom and flexibility to gift to IRS approved charities (501(c)(3)s)1 on their own schedule, even years after the transfer into the DAF is made.
Advantages of a Donor Advised Fund:
Investment Growth: Gifts made to a Donor Advised Fund can be invested, allowing gifted funds to appreciate over subsequent periods. The gifted assets’ gains are not taxed, allowing them to appreciate over time, potentially furthering charitable impact.
Tax Efficient Gifting: The secondary benefit of Donor Advised Fund is the tax efficiency. As mentioned above, assets gifted in the DAF are an immediate tax deduction regardless of when the assets are granted or sent to the charity. This allows for gift “stacking” where individuals send multiple years of planned gifting to maximize their itemized tax deduction.
Flexibility of Gifting: Donors can request grants at their preference, allowing them to gift at their cadence. Gifted assets can sit in a Donor Advised Fund for years if necessary. Any registered charity can be the beneficiary, allowing donors to gift to a bevy of charities supporting different causes.
Relief of Administrative Burden: Once a gift is made, the institution managing the Donor Advised Fund handles the administrative legwork of sending funds to charities. The convenience of one consolidated account reduces complexity and legwork required by the donor.
Legacy: Donor Advised Funds provide an opportunity to designate successor owners, allowing for the inclusion of children as the fund’s stewards. This fosters a culture of philanthropy and creates a lasting tradition of gifting that can be cherished by future generations.
Summary
Donor Advised Funds have risen in popularity in recent years due to their tax effectiveness, administrative relief, and flexibility. Charitably inclined individuals may benefit from utilizing a DAF and enjoying tax benefits, investment growth, and seeing their philanthropic efforts magnified.
As mentioned earlier, if someone wants to gift to their family or friends, a Donor Advised Fund is not the right vehicle. This is an irrevocable gift that can only be sent to qualified charities (501(c)(3) organizations).
If you are interested in maximizing your gifting strategy and making a tax-efficient impact, reach out to us to discuss how a DAF may benefit you as you plan for your charitable giving endeavors.
Source: 1https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
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