What is a Donor-Advised Fund?
A Donor Advised Fund or DAF, is a program sponsored by an organization classified as a public charity that allows a client to make an irrevocable charitable contribution, take advantage of an immediate tax benefit, and then recommend grants from the DAF over time to specified IRS-qualified 501(c)(3) public charities.
There are several benefits in establishing a DAF, including:
Providing for a tax deduction the year the contribution is made to the DAF (requires itemizing deductions when filing tax returns)
Accepts not only cash contributions but donations of appreciated securities, which may allow the owner to avoid potential Capital Gains Tax on the donated securities
Balance is invested and can grow over time
Far less costly than establishing a private foundation
Provides the flexibility to “lump” multiple year’s contributions in a single year while allowing donors to make Grants to Charities when they’re ready
Being intentional with your gifting strategy has become very important now that the standard deduction nearly doubled in size in 2018 due to the Tax Cuts and Jobs Act of 2017
What is the benefit of establishing a Donor Advised Fund?
Where can I set-up a DAF?
You would set up your donor-advised fund through a sponsoring organization. Sponsoring organizations are often established from financial services and investment firms, which provide investment management, administrative, and reporting services for the fund. The sponsoring organizations are recognized by the IRS as tax-exempt public charities, eligible to receive tax-deductible charitable contributions under the Internal Revenue Code.
While there is no contribution limit to a DAF, some institutions may require a minimum initial deposit. You should always discuss your desired contribution level with your financial and tax advisor to ensure you’re being as tax-efficient with your gifts as possible as certain deduction limitations may apply if contributions exceed a percentage of your adjusted gross income for the year.
How much can I contribute?
What charities qualify for distributions from a Donor Advised Fund?
You are able to direct grants from a DAF to qualifying nonprofit organizations. These qualified charities include houses of worship, organizations covered by a valid group exemption, government entities and 501(c)(3) tax-exempt charitable organizations. Fulfilling a pledge with a DAF is not permitted, nor is a Qualified Charitable Distribution (QCD) from an IRA.
Do I have to itemize deductions to reap the most tax benefits from my Donor Advised Fund contribution?
Yes, your contributions will not reduce your overall tax liability if your contributions do not exceed the standard deduction. A popular strategy to consider would be to lump gifts into one year to ensure you exceed the standard deduction. Click here to read a blog that covers this concept in greater detail. However, it’s still important to note that even if you aren’t able to itemize your DAF contribution, if you’re facilitating your gift with appreciated securities, there’s a still a tax benefit to you as the donor because you’re avoiding the capital gains tax on the position you gifted.
Contributions to a DAF are irrevocable. Raymond James does not provide legal or tax advice. Taxpayers should seek advice based from independent legal or tax professional prior to opening account.