A Donor-Advised Fund (DAF) is a charitable giving vehicle that allows individuals to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund to their preferred charities over time. DAFs are popular because they provide flexibility in charitable giving, allowing donors to manage their philanthropy over time, potentially increase the impact of their donations through investment growth, and benefit from an immediate tax deduction.
CONTRIBUTE A VARIETY OF ASSETS WITH EASE
Contributing to a DAF offers the flexibility to donate a wide variety of assets, making it an attractive option for those looking to give more than just cash. Whether you have appreciated securities, real estate, or even complex assets like privately held business interests, a DAF simplifies the process by handling the logistics of asset conversion and donation. This ease of giving non-cash assets allows you to maximize your charitable impact, often with significant tax benefits, while avoiding the hassle and complications typically associated with liquidating assets for donation. Examples include:
- Restricted stock
- Securities or mutual funds that are publicly traded
- Interests in private equity and hedge funds
- Specific complicated assets, like privately owned C Corp and S Corp shares
- Liquid assets, including checks, wire transfers, or cash balances from a brokerage account
- Bitcoin and various other cryptocurrencies
INVEST YOUR DONATION TO GROW TAX-FREE
Once you make a donation to a DAF, it's important to allocate those funds in a way that encourages tax-free growth, potentially increasing the impact of your donation over time. By investing the funds within the DAF, your contribution can grow, allowing for larger or more frequent future gifts to the charities of your choice. Some custodians even provide the option for a financial advisor to oversee the investments within the fund, tailoring the strategy to align with your charitable goals and risk tolerance. This approach not only enhances the potential for your donation to grow but also ensures that your philanthropic efforts are strategically managed for maximum impact.
TAX DEDUCTION
One of the most compelling benefits of contributing to a Donor-Advised Fund is the immediate tax deduction you can receive in the year of your contribution. When you donate cash to a DAF, you are typically eligible for a tax deduction of up to 60% of your adjusted gross income (AGI). For contributions of appreciated securities or other assets, the deduction is generally capped at 30% of your AGI. This deduction allows you to reduce your taxable income while supporting the causes you care about, even if you decide to distribute the funds to charities at a later date. Additionally, by contributing appreciated assets directly to a DAF, you can avoid capital gains taxes that would have been incurred if you had sold the assets first, thereby maximizing the amount available for charitable giving.
EASY RECORDKEEPING
Giving through a DAF simplifies financial recordkeeping by consolidating your charitable donations into a single account. Instead of tracking multiple receipts from different charities throughout the year, you only need to keep records of your contributions to the DAF itself. The DAF provider typically handles all the paperwork, including issuing you a receipt for your tax-deductible donations and managing the distribution of funds to the charities you recommend. This centralized approach not only streamlines your financial records but also makes it easier to manage and plan your charitable giving over time.
ESTATE PLANNING
Donor-Advised Funds can be seamlessly integrated into estate planning to enhance your legacy and ensure that your philanthropic goals are carried out according to your wishes. By naming a DAF as a beneficiary in your will, trust, or retirement account, you can establish a lasting charitable legacy that continues to support causes you care about after your passing. This approach also provides several benefits: it allows your heirs to manage and distribute charitable gifts over time, offers potential estate tax benefits by reducing the taxable estate, and simplifies the process for your family by centralizing charitable giving into one fund.
EXPENSES ASSOCIATED WITH A DAF
When considering the costs of setting up and maintaining a charitable giving vehicle, Donor-Advised Funds offer a cost-effective alternative to private foundations. Total fees for a DAF typically amount to about 1% of the fund's balance, which is generally lower than the operating costs associated with private foundations. Additionally, DAFs are free from the hefty legal fees and complex administrative responsibilities that often accompany private foundations. Setting up a DAF is straightforward, with the process involving just a few simple steps. Unlike private foundations, where ongoing management can be cumbersome, DAFs provide flexibility—you can manage the fund yourself or with the assistance of a financial advisor. This makes DAFs one of the most affordable, flexible, and efficient ways to facilitate charitable giving, offering a streamlined experience compared to the more traditional, and often more expensive, private foundation route.
LET’S TALK
At TruWealth Advisors, we advocate for the use of Donor-Advised Funds due to their unique benefits and their powerful ability to facilitate meaningful charitable giving. DAFs provide a flexible, tax-efficient way to support the causes you care about while simplifying the management of your charitable contributions. We believe that DAFs can be a key component of a well-rounded financial and philanthropic strategy. Contact us today for a no obligation initial consultation and let us help you explore options that best align with your giving goals and maximize the impact of your generosity.
Disclosures
TruWealth Advisors, LLC is an SEC registered investment adviser located in Louisiana. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or financial advice. You should consult your own tax, legal and financial professionals before engaging in any transaction. Past performance does not guarantee future results. Additional information about TruWealth Advisors, including our registration status, fees, and services is available on the SEC’s website at https://adviserinfo.sec.gov/firm/summary/306876.