Donor Advised Funds 101: Everything You Need to Know
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Are you looking for better tax-advantaged ways of giving to charity? Then you want to become familiar with Donor Advised Funds or DAFs. Here we will take a look at DAFs and how they work to supercharge your giving.
What are Donar Advised Funds?
A Donar Advised Fund or DAF is an entity similar to a brokerage account that a donor opens with a sponsoring organization like fidelity charitable for their charitable giving. DAFs are an alternative to establishing a private foundation for people who give to 501(c)(3) organizations. The donor can contribute various types of assets from cash to publicly traded securities, stocks, cryptocurrencies, mutual funds, and non-publicly traded assets. The donor can also dollar cost average into assets overtime with in the fund. DAFs allow you take cash you would give and put that money into investments, so your gifts to can be even more generous.
How Does a Donar Advised Fund Work?
For a donor to open a DAF, they will not have to contribute anything, but a good starting amount could be $5,000. That is because there is usually a $100 minimum annual fee to maintain the account on accounts less than $16,667. That $100 fee on a balance of $500 is 20% which would be hard to overcome, but on a balance of $5,000 that fee is 2% which is more reasonable. That donation immediately qualifies for a 100% tax deduction. Additionally, all assets in a DAF can appreciate tax-free until they are distributed to the recipient or recipients. You do not have to grant the money right away either. You qualify for the tax deduction immediately, but can schedule the gift to be given out at later date years down the road if necessary. Because of this DAFs are one of the most tax-efficient ways that people can leave a legacy. Important note the assets in the DAF are no longer the donors. Technically the assets are given up to charity and can not be taken back once given. Donors technically just advise how the assets in the fund should be used. The donor received the tax break, so Uncle Sam doesn’t want you to have your cake and eat it too.
What Makes Donar Advised Funds a Big Deal?
There are several reasons why DAFs have exploded in popularity over the last few years. Here is a look at three things that make DAFs so popular:
Various Tax Savings
As stated before, the donor can enjoy multiple tax advantages when it comes to contributing to a DAF. First, all contributions into a DAF are tax deductible. This could be advantageous for high-income individuals who can exceed the contribution amounts to other charitable vehicles. Second, all appreciation inside of a DAF is tax-free. Thirdly, you can contribute assets that have appreciated to avoid or reduce paying capital gains tax. This is useful because assets like stocks that have been held for more than one year can be donated at their appreciated value, without capital gains tax. If a donor were to sell their assets and later donate the proceeds to their DAF, the amount would be smaller because donors have to pay capital gains tax, leaving less money available for philanthropy.
No Giving Limit
DAFs make giving to charity much easier for high-net-worth individuals. Those who want to give more than six figures per year will be able to do so with a DAF and enjoy a 100% tax deduction.
Easy to Open and Manage
Anyone can open a DAF through a custodian broker such as Fidelity or Schwab. Because of this, opening a DAF is simple as well as cost-effective. It can simplify your giving. With a DAF you can donate to multiple charities and only have to keep one set of tax records.
Interesting Facts Regarding Donar Advised Funds
If you are not familiar with DAFs, then you should know that they are one of the fast-growing giving vehicles for high-net-worth individuals. Here are some interesting facts regarding the growth of DAFs.
In 2019, total DAF contributions exceeded 38 billion dollars. This is a 7.5% increase from the year before.
20% of contributions to DAFs go to non-profits.
The total number of DAF accounts has increased by 20% in 2021. The total number of DAFs is expected to move higher in 2022.
16% of all DAFs in 2021 were opened by millennials. This is an increase from 9% the years before. This trend is expected to move higher during the next decade.
Getting Started With a Donar Advised Fund
If you are looking for a smart and easy method for tax-advantaged giving, then opening a DAF is one of the most logical choices one can make. It can help you save money, simplify your giving, and give more. The more you can give the more good that can be done. Be sure to consult a wealth advisor before making any financial decision.
