Understanding Donor-Advised FundsA donor-advised fund is a charitable giving vehicle that allows donors to make irrevocable contributions of assets—such as cash, securities, or other appreciated assets—into a specialized fund. Donors can then direct those contributions to other qualified charitable organizations in the future and invest the funds for growth in the meantime. By allowing a single, deductible donation that can subsequently be distributed to multiple charities, DAFs empower donors to support various causes over time with fewer administrative headaches than with other charitable strategies.
Benefits of Donor-Advised FundsIn addition to administrative simplicity, DAFs offer multiple other benefits.
Tax EfficiencyOne of the primary advantages of donor-advised funds lies in their tax efficiency. By contributing to a DAF, donors receive an immediate tax deduction, allowing them to maximize the impact of their giving while minimizing their tax liability. Further, donating appreciated non-cash assets can potentially eliminate the capital gains tax that the asset sale would incur. This could increase the amount available for charity by up to 20% (instead of selling an asset, paying taxes, and contributing the remainder).
Donors can also “bunch” contributions by contributing more to a DAF in years where the tax savings are best and foregoing contributions in low-tax years. While donors will get the full tax benefit in one year, they’ll maintain the flexibility to distribute grants to their favorite charities over multiple years. Finally, donations to a donor-advised fund are irrevocable. Since those assets no longer count toward an estate’s value, they aren’t subject to estate taxes.