Americans donate billions to charity annually. If you give to charity, you need to know about one of the best tools to facilitate generosity: Donor-Advised Funds (DAFs).
DAFs date from the 1930s but did not become popular until the 1990s. DAFs act as vehicles for receiving gifts, often of appreciated stocks, real estate or other assets, then distribute cash grants to charities selected by the person(s) making the donation. DAFs make the process of transferring appreciated assets and designating funds to charities very simple.
A tax deduction is received on the date the appreciated asset is transferred from the donor’s control. The entire deduction can be used during one calendar year even if the DAF does not distribute grant money to charity/charities until subsequent year(s).
Once received by the DAF, the appreciated asset gifted is sold. The DAF, itself a charity, pays no tax on any capital gain realized. The proceeds may remain in cash or the donor may direct the DAF to invest the funds for potential future appreciation, while deciding which charities to support.
Any subsequent change in value of the account does not change the amount the donor can deduct on his/her/their taxes. The donor directs to which charities the DAF distributes assets. Officially, the DAF owns the assets and is not legally bound to use them as directed, but it is exceedingly rare for a DAF to not follow a donor’s advice.
Donors can support any IRS-qualified public charities. After a gift is suggested, the DAF vets and processes the suggestion to ensure the organization qualifies under the IRS code. DAFs handle all record keeping and due diligence and can protect the donor’s identity if anonymity is desired.
DAFs are the fastest growing charitable giving vehicle in the United States, with more than 400,000 donor-advised accounts holding over $ 100 billion in assets.
Besides considering a DAF, here are other ways to make your charitable giving more significant:
- Focus your effort. Passionate giving is more sustainable than spreading donations to every good cause or to everyone who asks. Consider focusing your donations to just a few charities. Think through why you are giving and what you feel passionate about.
- Find bang for the buck. Fund programs that produce the greatest effect for the least money and focus on the long-term positive outcomes.
- Include the next generation. You can include your children in the giving process or even help them gift some of their own money.
- Tax efficiency. Consider ways to give tax efficiently. DAFs are only one way to give tax efficiently. There are other strategies involving retirement accounts and estate planning that allow pre-tax dollar amounts to go to charity.
Be sure to talk to your Financial Adviser or give us a call. Here at SSFFA, we look forward to helping clients achieve a greater sense of control over their financial affairs.
Cynthia J. Morris, CFA, CFP®, Senior Wealth Adviser