Should You Use Donor-Advised Funds for Your Charitable Giving?
Do you want to establish a strong charitable legacy? Donate strategically and in the most tax-efficient way possible? Support causes you believe in — but without a lot of legwork? Then a donor-advised fund account may be a good idea for you.
A donor-advised fund, or DAF, is an account that you invest in specifically for the purpose of using those funds to make charitable contributions. DAFs are created or sponsored by a charity, and are often charitable arms of financial firms (such as Fidelity or Vanguard). Here are some of the benefits:
It’s a strategic way to give. With a DAF, you’re not just giving to charitable organizations. When you contribute to a donor-advised fund, rather than donating directly to charity, you’re effectively increasing your gift — and your impact — because the assets in your account can grow tax-free over time, just like other investments grow. You can also take your time determining which charities you’d like to donate the funds to.
You can contribute more than cash. With a DAF, you’re able to donate cash, but you’re also able to donate stocks and securities, as well as non-publicly traded assets (including restricted stock, retirement assets, cryptocurrencies, and life insurance) and privately held business interests (such as private company C-corp or S-corp stock, LLC and limited partnership interests, and private equity).
It’s tax advantageous. When you make a contribution to a DAF, you are eligible for an immediate tax deduction. Plus, the funds in your account can grow tax-free. If donating long-term appreciated assets you’ve held for a year or more, you can also eliminate capital gains tax.
It enables you to more easily establish your legacy. Once you create and fund your account, it enables you to give both during and after your lifetime. After your death, you can lay out succession instructions with the donor-advised fund sponsor to ensure the fund continues to meet your charitable giving goals.
Record keeping is more efficient and simplified. Rather than trying to keep track of all gift acknowledgements and letters, you will instead receive receipts from your contributions.
DAFs can be private. Donations are not publicly reported, so some people prefer DAFs over private foundations.
These are all good reasons that DAFs are one of the fastest growing ways to make a philanthropic impact. But there are some caveats, or rules and restrictions, that you should be aware of if you decide to use these charitable giving vehicles.
First, a DAF is irrevocable. Once you contribute to a DAF, you’re unable to take back the assets placed in the DAF.
Gifted assets don’t belong to you. This almost goes without saying, but once you gift assets, they belong to the sponsoring organization (the section 501(c)(3) organization that maintains or operates the fund, such as Vanguard Charitable or Fidelity Charitable).
Your charitable gifts, or grants, must go to a public charity recognized by the IRS. Any grants that you recommend must go to organizations that have 501(c)(3) designation.
You cannot benefit personally from your grants. This means you’re not allowed to receive any goods, services or other benefits (such as tickets to a charitable event) in return for your donation.
Deductions of cash contributions are limited to 60% of your adjusted gross income (AGI) for a given year. That limit is 30% of AGI for long-term capital gains. There is a special rule for 2020 and 2021, however, that allows deductions of cash donations up to 100% of AGI.