As you’re wrapping up the year, don’t forget about your favorite causes! Most charities need your help to meet their year-end goals, so be generous but be smart with your gift-giving.
By Meredith LaRock, CFP®, CTFA – Vice President & Wealth Management Advisor
In recent years, Donor Advised Funds (DAFs) have gained significant popularity as a powerful tool for charitable giving. These funds offer individuals and families a flexible, efficient, and tax-advantaged way to reach their philanthropic goals while maximizing the impact of their donations. With their numerous benefits and ease of use, DAFs have become a preferred choice for many donors looking to make a difference in their communities.
What is a Donor Advised Fund?
A Donor Advised Fund (DAF) is a charitable giving vehicle that allows donors to make contributions to a fund, receive an immediate income tax deduction, and then recommend grants to qualified nonprofit organizations over time. Grants must go to a public, 501(c)(3) nonprofit organization recognized by the IRS.
DAFs are typically managed by public charities or financial institutions, which handle the administrative tasks and investment management of the funds at a relatively low cost.
The most powerful benefits of using a Donor Advised Fund are the tax advantages.
In addition to the income tax deduction for the contribution, you also avoid realized gains on appreciated assets that are contributed. To receive a deduction equal to the fair market value of the assets, the assets should be long-term (owned for at least twelve months). The allowable deduction for assets held less than twelve months is the cost basis of the contributed asset. There are deduction limits that apply to DAF funding. In 2023, cash contributions are limited to 60% of your Adjusted Gross Income (AGI) and stocks and other appreciated securities are limited to 30% of AGI. There is a five-year carry-forward for unused deductions.
You can be strategic with the timing of your contributions by frontloading numerous years of planned giving into a singular, higher than usual, income tax year. For example, if you are selling a business or doing a ROTH conversion, the deduction will be more valuable when you are subject to higher income tax brackets.
The standard deduction has more than doubled since the enactment of the Tax Cuts and Jobs Act in 2017.
Those who are charitably inclined and find themselves on the margin between taking the standard deduction or itemizing could maximize their tax benefits by “bunching” two years of charitable contributions into one year, itemizing deductions for that year, and taking the standard deduction the next year.
Another significant benefit of DAFs is the ability to grow the funds tax-free and it will never be subject to income or estate tax. Once a contribution is made to a DAF, it can be invested and grow over time, allowing donors to make a more substantial impact with their donations. The investment options available within DAFs are often diverse and professionally managed.
DAFs offer donors the opportunity to involve their family members in the giving process.
Many DAFs allow donors to name successors or create a legacy by involving their children or grandchildren in recommending grants. This not only fosters a culture of philanthropy within the family but also provides an avenue for passing down charitable values and creating a lasting impact for generations to come.
DAFs can provide a level of privacy for donors who prefer to remain anonymous.
When making grants from a DAF, the grant can be made anonymously to the recipient organization, allowing individuals to support causes they care about without drawing attention to themselves. This can be particularly appealing for donors who wish to avoid solicitation or maintain a low profile.
The administrative burden of direct giving to charities is relieved with a Donor Advised Fund.
Tasks, such as record-keeping, due diligence, and tax reporting, are handled by the sponsoring organization, relieving donors of the burden of managing these responsibilities themselves. This allows donors to focus on their philanthropic goals and the impact they want to make, rather than getting caught up in administrative details.
With their flexibility, tax advantages, investment growth potential, and family involvement opportunities, DAFs offer donors a powerful way to make a meaningful difference in their communities. Whether it’s supporting a specific cause, creating a family legacy, or maintaining privacy, DAFs provide a streamlined and efficient approach to philanthropy.
You should always consult with a trusted Advisor when evaluating charitable planning strategies. If you would like to learn more about establishing a Donor Advised Fund or other strategies including a Foundation, Charitable Remainder Trust, or Charitable Lead Trust, please contact your local Central Trust Advisor, we are here to help.
Central Trust Company does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. Please consult with your tax advisor before engaging in any transaction.
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