A donor-advised fund is an account that allows you to make a donation, invest the money, and then make grants from the account to your chosen charities over time.
With a DAF, you can make a large contribution and get the full deduction (up to IRS limits) when you file your taxes for that year. Your donation is initially invested by the DAF until you decide where to direct it, which could be years in the future. (Those disbursements of money from the DAF are called “grants,” and while you can choose to recommend grants to any public 501(c)(3) organization, the DAF has to approve them – you no longer own or control the assets.)
A DAF can be a great option if you:
- Plan to make a donation as part of your tax strategy but need more time to decide where you want it to go. This often is the case if you have a year with a lot of income from large capital gains or a home sale, for example.
- Want to grow the amount – and therefore the impact – you’ll ultimately be able to offer your chosen causes. (Growth in a DAF is tax-free.)
- Support many causes and want to simplify your recordkeeping. With a DAF, you have one contribution to report but can choose a different charity to grant to each time.
- Have noncash assets you want to donate to a charitable organization that can’t accept them. DAFs can accept gifts of stocks, mutual fund shares, real estate and more.
- Don’t normally donate enough to make itemizing deductions worth it. If you have the ability, you could make one large donation to get the write-off, and then spread out your grants over several years.
“I’ve had clients who normally give $2,000 to charities every year instead make a $10,000 donation to a DAF,” says Director of Estate Planning Rodney Weaver. “Then, over the next several years, they’ll grant money out of the DAF to the charities that they would normally give to. By pulling their charitable donations forward into one year, they’re able to itemize all of their deductions – charitable donations, mortgage interest, property taxes, state and local income taxes – which together might be larger than the standard deduction.”
Here are some things you’ll want to remember with a DAF:
- A DAF charges fees, so you’ll want to make sure it makes sense for you before you move ahead.
- You can’t combine these strategies and direct a QCD to a DAF.
- You deduct DAF contributions when you fund the DAF. You can’t deduct the grants later on, too.
- If you establish a DAF, you should name a beneficiary who can continue to honor your wishes for the money if needed.
Donations are irreversible, so make sure you’ve considered all the angles. Wondering if a QCD or DAF would be better for you? Edelman Financial Engines planners can help make sure you’re using the right strategies for your situation.