With roots back to the 1930s, donor-advised funds (DAF) have become more popular as philanthropic vehicles to increase giving and reduce tax liability. But what makes a DAF so appealing, how do they work, and how can one decide if it would be the right choice for them? The goal of this blog will be to provide simple answers to those questions.
Baseline Understanding of Donor-Advised Funds
To effectively evaluate if a donor-advised fund is suitable for an individual, there needs to be a baseline understanding of what it can do. Simply put, a donor-advised fund is a charitable investment vehicle that allows donors to make irrevocable, tax-deductible contributions. These contributions can consist of cash, stock, real estate, or other personal assets. Due to the fund being an investment vehicle, the contributions can grow and are tax-free when contributed to the qualifying organization. Many of the larger financial investing firms (Vanguard, Fidelity, Schwab, etc.) can help set up and manage these funds. In addition, the DAF will have its unique name chosen by the donor(s), allowing individuals, families, or companies to create a legacy or even create anonymity depending on their preference.
Benefits of Donor-Advised Funds
What are some of the possible factors that cause them to be appealing and worth opening with this understanding? One potential benefit is the ability to have more flexibility of when you give to charity. An individual can contribute any of the assets mentioned above in a tax year and receive an automatic tax deduction that year, yet not disperse any of those assets until future tax years. This comes in most useful when a taxpayer wants to contribute but has no specific charity in mind. It also allows the taxpayer to donate larger one-time donations, which are often done during matching challenges, which help to create more significant benefits for the charity. Another benefit of using a DAF is being able to donate appreciated stocks or investments without having to experience any capital gains. This is huge in years where the stock has appreciated. Rather than cash out those stocks, which trigger capital gains, individuals can contribute them directly into a DAF and receive the fair market value for their donation. This, of course, allows more money to be available for the charities due to the taxpayer not having to withhold any of the funds from the sale for taxes. The stock can then be sold inside the donor-advised fund, without and capital gains, and contributed to the charity of choice. The third advantage for utilizing a DAF is to create a legacy. As mentioned previously, the fund will have its name, and control of the fund can be passed on to future generations or successors. This gives the fund the potential to make greater and larger impacts than any one individual could hope to do during their lifetime.
Get insight from a Trusted CPA for your Donor-Advised Funds
Donor-advise funds are an excellent resource for those individuals or businesses that desire to impact their community or the world through philanthropic giving. Although there are many benefits to establishing a DAF, there are still specific rules depending on where it is set up. It is highly recommended that an individual or business contact their financial advisor and/or CPA to get the most out of the DAF and ensure it is right.
Abacus CPAs LLC has a great team of tax, accounting and business consulting professionals. If you are interested and want to hear more about our services, please call 417-823-7171, and we are here to serve you and your business.
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