Examining Donor-Advised Funds

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 securities (typically stocks, ETFs, or mutual funds), and then distributing cash grants to charities selected by the one making the donation. DAFs make the process as simple as a bank’s bill-paying system.

All DAF donors receive a tax deduction on the date of transfer, even if the DAF makes a distribution of grant money to a charity in a subsequent year. According to Internal Revenue Service rules, you calculate the value of your donation and the resulting fixed deduction based on the average of the high and the low market price on the day of transfer. (We can help you compute this value.)

After receipt, the securities you gifted are sold, and the DAF, a charity, pays no tax on any capital gain realized. The proceeds may remain in cash, or you may direct the DAF to invest those assets for potential further appreciation. Any subsequent change in the value of the account does not change the amount you can deduct on your taxes. As the donor, you direct to which charities the DAF distributes assets. DAFs maintain a database of 501(c)(3) tax-exempt charities from which you choose. After you suggest an amount to gift and a charity to receive the gift, the DAF vets and processes your suggestion to ensure the organization qualifies as a public charity under the IRS code. DAFs also handle all record keeping and due diligence and can protect your identity if you want to give anonymously.

Donor-advised funds are the fastest growing charitable giving vehicle in the United States, with over 269,000 donor-advised accounts holding over $78 billion in assets.

I’ve helped charitably inclined clients set up, fund, and use DAFs for many years. This is one of the true “win-wins” I see in my planning work.

Are you giving to charity in the most effective way? Give me a call at 949-441-4410 and we can discuss giving strategies.

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