A Donor Advised Fund is another way to gift money to your favorite charities and be financially beneficial to you at the same time. The DAF allows you to set aside money to contribute to a charity in the future, even without knowing the details of who you want to donate the money to or when you want to donate the money. You can take the full charitable deduction (up to 50% of your Adjusted Growth Income if donating cash or 30% of your AGI if donating appreciated stock) in the year you make the contribution, rather than the year you would actually gift the money. This tool gives a tremendous amount of flexibility when it comes to tax planning and deciding what charities you want to support.
Here are a couple scenarios where it would make sense to look into a Donor Advised Fund:
You’ve had a high income year and you are looking for a tax shelter.
If you know that you are going to recognize significantly more money one year and want to find ways to reduce your taxable income, the DAF might be a great option to reduce your tax liability and help achieve long-term giving goals.
The concept is to take the deductions while you are in a higher income bracket and avoid income tax now, even though you would give the money in another year.
You have the income and you know you want to give, but aren’t sure what charities you want to give to.
A Donor Advised Fund contribution makes sense if giving to charity is important to you and you want to make large donations in the future, but you haven’t had time to research charities. The DAF will give you the tax deductions, as well as the growing fund, to give you options for when you find the charities that you would like to support.
It’s important to remember that only 501©(3) charities are eligible.
When a DAF doesn’t make sense:
If you are giving the same amount every year and plan to continue doing it forever.
For example, if you are retired and you give a consistent amount of money to your church every year and plan to do that indefinitely, the Donor Advised Fund will just be another unnecessary step in the gifting process. If you were to put money into the DAF only to pull it out every year, the benefit would be negligible and not worth the hassle.
If this is your situation, it may make more sense to use other tax tools that are available, including the Qualified Charitable Distribution from your IRA account or giving your appreciated stock to charity. Both of these methods would allow you to receive an additional tax benefit on top of your original charitable deduction.
If you aren’t sure that your overall financial plan can support the money going to charity.
A Donor Advised Fund is a great tool to use in the context of an overall financial plan. It’s important to remember, however, that when you make a contribution to your DAF, your giving decision becomes a permanent decision. If life were to change for you (i.e. you lost your job or you were unable to work), the money you gave to the DAF would not be available to you.
Decide if a Donor Advised Fund is right for you. Keep in mind there should be a balance between aggressively funding your giving goals to save money on taxes and assuring that your other financial goals are being met as well.