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A Donor-Advised Fund (DAF) is a charitable giving account that lets you contribute cash or investments, receive an immediate tax deduction, and recommend grants to your favorite 501(c)(3) charities over time. It’s a flexible alternative to a private foundation for donors who want tax efficiency without the administrative overhead.
A charitably minded business owner in the process of selling the business; an executive no longer able to itemize charitable contributions. Both individuals want to give back to their community: both want to have a level of control over the funds while taking advantage of the tax breaks afforded to them. Each should consider opening and funding a Donor-Advised Fund (DAF). What is a DAF, how does it work, and is a DAF right for you?
A Donor-Advised Fund (DAF) is a charitable account held at a 501(c)(3) organization. Though the contributions to a DAF are owned by the charitable organization, you still have advisory authority over where and how the funds are distributed. The funds inside the DAF can either be held in cash or invested, and disbursements from a DAF must go to other 501(c)(3) charities. Unlike some retirement accounts, DAFs do not have required minimum distributions.
How Does a Donor-Advised Fund Work?
Any contributions to a DAF are tax-deductible, while any grants from a DAF are not. While the DAF sponsoring organization has legal ownership of the funds, you maintain a level of control. You determine if (and how) the funds are invested and when the funds are dispersed.
For example: You make an irrevocable contribution of $24,000 worth of your Vanguard S&P 500 Index Fund to your DAF. Assuming you qualify for the deduction, your tax return will show a $24,000 deduction for the year of the contribution. These funds now legally belong to the DAF sponsoring organization. You decide to leave the funds in cash and disperse the money over three years in $8,000 increments.
At your death, the funds in the DAF are not a part of your taxable estate. However, you have the option to name a successor advisor on the account whose responsibility it will be to oversee the distribution of the account.
Should I Open a Donor-Advised Fund?
There are several considerations to think through that will determine whether a DAF is right for you.
- Are you looking for a large tax deduction to offset a high-income year, but want to spread the charitable distributions over time? This approach is sometimes called bunching charitable contributions.
- Do you have highly appreciated assets: individual stocks, mutual funds, real estate, and even a closely held business?
- Do you have multi-year charitable gifting goals?
- Do you plan to leave money to charity at your death and want your children to be involved in the process of disbursing the funds?
Decide if a Donor-Advised Fund Is Right for You
For many, the tax savings alone make a Donor Advised Fund worth considering. Coupled with the ability to involve family members in the decision-making process, Donor Advised Funds provide an attractive option for giving to charity. Check with your CPA or financial advisor to understand the rules and tax implications for DAFs.
Frequently Asked Questions
No. A DAF is a charitable account held within a sponsoring 501(c)(3) organization. A DAF has lower setup costs and less administrative burden than a private foundation, which is its own separate legal entity with its own filing and distribution requirements.
Minimum contributions vary by sponsoring organization and can be as low as $500. Abacus does not typically recommend opening an account until you plan to give at least $5,000 to charity.
No. A contribution to a DAF is irrevocable. Once assets are contributed, they legally belong to the sponsoring organization and can only be granted out to other 501(c)(3) charities.
Stephen E. Maggard
