Make a difference and reduce your taxes with this savings account

/

Donor-advised funds (DAFs) are the fastest-growing charitable giving vehicle in the United States because they are easy to manage and tax-advantageous. According to the National Philanthropic Trust, grants from DAFs to qualified charities totaled an estimated $45.74 billion, a 28.2% increase compared to 2020.

A donor-advised fund is like a holding or “savings” account for funds you wish to donate to a charitable organization. You can contribute cash, securities, or other assets to a donor-advised fund that will go directly to the causes you care about. The funds you contribute to a donor-advised fund grow tax-free and usually qualify as a tax deduction.

How does a donor-advised fund work?

As an individual, you can donate cash, stocks (securities), or non-publicly traded assets such as private business interests, cryptocurrency, and private company stock to a DAF.

The funds can not be returned to you or used for any other purposes other than as a charitable donation. While you are deciding which charities to support, your donor-advised fund is growing tax-free.

What are the benefits of a donor-advised fund?

1. Nearly any asset is eligible to contribute to a donor-advised fund

Most charities only accept donations in the form of cash or credit cards. But, what if you have stocks, cryptocurrency, and other assets? You can use a donor-advised fund to turn those assets into donations. In some cases, it’s possible to transfer stock directly from your brokerage account with the click of a button. 

Assets generally accepted include:

  • Cash equivalents, such as checks, wire transfers, or cash positions from a brokerage account

  • Publicly traded securities or mutual fund shares

  • Restricted stock

  • Bitcoin and other cryptocurrencies

  • Private equity and hedge fund interests

  • Certain complex assets, such as privately held C-corp and S-corp shares

2. Boost your tax benefits

Similar to donating to your local food pantry or shelter, your donations are tax-deductible. However, some donations come with additional benefits.

Cash donations
If you donate cash, via check or wire transfer, you may be eligible for an income tax deduction of up to 60 percent of your adjusted gross income.

Donations of long-term appreciated assets
Donating long-term appreciated securities directly to your charity of choice—as opposed to liquidating the asset and donating the proceeds—can boost both your tax benefit and the overall amount you have to grant to charity. These donations provide two tax benefits:

  • Become eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of your adjusted gross income.

  • Eliminate capital gains tax on long-term appreciated assets, as long as they’ve been held for more than a year.

3. Your donation grows tax-free

Once you have opened and funded your donor-advised fund, you can work with your financial advisor to attach an investment strategy to it. Hopefully, the strategy yields growth. If it does, you will not have to pay taxes on the growth. This means you have more money you can donate to your charity of choice.

4. Simplified records

When you donate to charities you have to keep a record for tax deduction purposes. This can be tough to stay on top of because of the various paperwork. With a donor-advised fund, all of the information is in one place making it easier to keep organized records.

5. Support your legacy planning

You can incorporate your donor-advised fund into estate planning by making a bequest in your will to the donor-advised fund sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy, or charitable trust.

The sponsor is a 501(c) (3) organization that has legal control over the donor-advised fund. Depending upon your instructions, your fund can be gifted to many charities or one. These gifts can also help reduce or eliminate the burden of the estate tax for your heirs. Every sponsoring organization handles this differently, but in any case, donor-advised funds could be a valuable tool for estate planning.

How does my donor-advised fund help my favorite causes?

Your donor-advised fund can:

  • Gift grants to IRS-qualified public charities that you wish to support.

  • Give you the option to gift anonymous grants to charities. Gifting anonymously is not always an option, but some donor-advised funds offer this as an option.

  • You can gift a grant “in honor of” or “in memory of” a loved one.

  • You can specify a specific cause, campaign, or purpose for your grant recommendation.

What are the limitations of a donor-advised fund?

A donor-advised fund does not:

  • Support NON-501(c)(3) organizations, such as political groups or crowdfunding campaigns. This is a benefit afforded to private foundations which can make grants to NON IRS-qualified 501(c)(3) organizations.

  • Use the funds for personal reasons.