Tax Benefits of Using Donor-Advised Funds For Charitable Giving

There are many ways to give to charity, from a simple cash gift, to more complex strategies using trusts or family founda­tions. Somewhere in the middle of the two are donor-advised funds (or DAFs).

According to a recent report from the National Philan­thropic Trust, there are now more than 217,000 donor-advised funds and investment firms, such as Fidelity, Charles Schwab, Vanguard, and Goldman Sachs that have benefited from the growth of these accounts.

A DAF is a type of account that is set up to receive donated assets, such as cash, stocks, and real estate. The DAF itself can even be the benefi­ciary of an IRA or trust. The donor typically gets a tax deduction in the year the gift is made (up to certain IRS limits) and later makes a ”grant” or gift from the account. Essen­tially, the donor can give the grant to a charity immedi­ately or choose to donate several gifts over time. This allows the contributed funds to be invested and (hopefully) grow tax-free until distributed. Also, a single transfer to a DAF can be split among multiple 501(c)(3) organi­za­tions.

Gifting appre­ciated assets directly to a charity can result in a double tax benefit:

1) You avoid paying capital gains tax on the appre­ciated asset.

2) The gifted amount is an eligible tax deduction. But what if the charity you want to benefit is too small and doesn’t have the means to accept something like a gift of stock? A DAF can be very useful in this case. The asset can easily be sold and the charity would then receive the cash.

Another benefit is that these accounts can be a great tool for someone with a big spike in income. The donor can make an off-setting chari­table donation to the DAF in the year it is most effective and still have time to figure out which charities to support. This could be useful in the case of a business sale, stock option exercise, or a big bonus.

There are a few negatives of DAFs to be aware of, including sometimes large account minimums, admin­is­trative fees, irrev­o­cable contri­bu­tions, and the fact that the charity may not get all of the money right away.