An important tax planning and charitable giving tool is the Donor-Advised Fund (DAF). There are hundreds of DAFs offered by non-profits, community and corporate foundations, and so on. Since DAFs are sponsored by 501(c)(3) non-profit organizations, donations:
- are irrevocable
- may be tax-deductible
However, DAFs are “donor-advised,” which means that donors may continue to direct:
- investment decisions
- grant recommendations
Donors receive an income tax deduction when assets are donated into the DAF, but may continue to “advise” the DAF on investments and grants. Effectively, this means that donors can still direct how the assets are invested and granted.
The assets can remain in the DAF indefinitely before being granted out to the final 501(c)(3) non-profit. Thus, a donor can donate assets this year, but does not need to decide on the final non-profit recipient this year. The donor can decide where to direct the grant next year or in 10 years or beyond.
- Many DAFs can accept complex assets (such as real estate or business interests) that smaller non-profits are unable to handle.
- If anonymity is desired, grants can simply be reported under the DAF and not from the original donor.
- Once donated, assets can be sold without incurring capital gains tax and/or any future growth is tax-free.
A Flexible Solution
Investment considerations and tax planning often determine how and when to maximize the tax value of donations. However, these factors may not align with the charities that one supports. For instance, what if a charity is unable to accept stock options? Or perhaps a charity could use more recurring monthly donations rather than yet-another-lump-sum donation in December? A DAF is a great vehicle that can solve for these and other challenges.