How To Harness The Benefits Of Donor-Advised Funds In Your Tax Planning
By: Kevin Flint, CFP®
There are many financial and tax planning topics to get excited about, but donor-advised funds are at the top of the list.
That’s because these funds are a tool that provide a rare win-win situation for our clients and the non-profit organizations and communities they love.
You Can Leverage Donor-Advised Funds For Greater Flexibility In Tax Planning.
A donor-advised fund (DAF) is a charitable giving mechanism that allows individuals and families to make a charitable gift, receive an immediate tax deduction, and then recommend grants from the DAF to qualified charitable organizations over a more extended period of time (more than just one tax year).
The main benefit of creating a DAF is flexibility. Donors can get the tax deduction in the year they need it, while retaining the ability to support their favorite charities with smaller, annual amounts.
DAFs Can Lower Your Short-Term Tax Obligation & Spread Out Your Charitable Giving.
You might be asking yourself—OK great, but why does it make sense for me to use a donor-advised fund?
Here’s an example of how leveraging a DAF can benefit your tax planning strategy in a given year:
- Suppose you had a large capital gain from the sale of an asset in a given tax year (investments, rental property, business, etc.) Sometimes, a capital gain can push you into a higher tax bracket for only the tax year in which you sold the asset.
- You have cash available from the sale ($50,000) that you’ve decided to set aside for a charitable gift (and a tax deduction) to lower your tax obligation in the year that you sold the asset.
- You have your favorite non-profit in mind that you want to support but feel slightly uncomfortable about giving them a large, one-time gift.
- Instead, you’d like to support them over a few years, at a smaller level.
- This is where donor-advised funds come in. You can make the gift to a DAF, realize the entire $50,000 tax deduction in that year, and then recommend grants in the future (from your fund) to your favorite charity in more comfortable amounts.
In other words, instead of making a large, one-time gift, you can make smaller gifts over many years. A win-win!
Common Questions Related To Donor-Advised Funds.
Here are frequently asked questions from our clients about donor-advised funds.
- Who Would Manage My Donor-Advised Fund? DAFs are most often held and managed by local community foundations. Larger financial institutions also provide them as well.
- What Can I Fund A DAF With? In most cases, individuals can fund DAFs with appreciated securities, cash, and other asset types.
- Do I Own My DAF? Once the gift is made to a DAF, the donor no longer owns the funds. The donor can only make recommendations on where to grant dollars to. The managing entity has the final say over where the dollars can go.
- Do The Funds Sit There Or Are They Invested? Often, dollars in DAFs are invested in the stock market, which allows for charitable dollars to have the potential to grow over time, making an even larger impact on communities.
Hess Can Help Bridge The Gap Between Tax Planning & Charitable Giving With DAF Advice.
This post just scratches the surface of how DAFs work and how they can bridge the gap between tax situations and charitable desires. Please reach out to any one of our CFP® professionals to learn more about DAFs and how they might benefit your tax planning and your community.
“Generally, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it; however, the donor, or donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.”
