Donor Advised Funds
Donor Advised Funds (DAF) were first created in the 1930s. This type of fund is a vehicle for donors to give to charities and enjoy immediate tax benefits. Over time, the donor can recommend grants from the fund. In some ways, these funds operate like a charitable savings account. They have become increasingly popular among philanthropic givers who can add funds to whenever they deem fit.
History of Donor Advised Funds
The first donor advised funds were initiated by the New York Community Trust in 1931. The legal structure for these funds, however, was not formally put into place by Congress until 1969. Since that time, donor advised funds have become a fast-growing platform for philanthropic giving across a wide spectrum, including educational institutions and a variety of independent charities. In the United States, there are more than 170,000 donor advised funds, which amounts to roughly 3% of all charitable giving in the country.
The Benefits of Donor Advised Funds
The greatest benefit to this investment vehicle is the control you have of the fund and ease of which you can donate. The fund can be permanently endowed and the donor can make non-binding recommendations to the organization as to how the funds are distributed. You also have a variety of investment options allowing the contribution to potentially grow over time. Donor advised funds help to create a legacy versus providing a one-time gift. Another benefit of donor advised funds is that donors can receive an immediate tax break once they make their donation. Rather than donate straight to a non-profit, donors can submit funds to the DAF and worry about actually allocating them later on. Even though the funds aren't technically released for a charitable cause, the donor still receives their tax benefit. The fund can also grow tax-free and, while there are fees associated with the DAF, many people find the benefits far outweigh the fee they are charged. Donors enjoy the benefit of having time to plan their grants before releasing the funds to a charity.
Of course, donor advised funds offer other benefits as well. Because they are easy to create, there are few professional fees needed and donors can even forgo the assistance of an attorney. Once the fund is created, it establishes a convenient platform for future giving and is an important resource for tax planning. Many charitable givers prefer DAF because giving to private foundations is fraught with more rules and regulations. For example, the payout must be made each year and the administrative fees tend to be more costly.
DAF Tax Breaks
The main tax break associated with giving to donor advised funds is that they qualify the giver for an immediate income tax benefit. There is also no capital gains tax on any gifts of appreciated assets like real estate or securities. The DAF isn't associated with estate taxes and isn't subject to annual taxes. Because the tax benefit is immediate, donors can take advantage of giving right away and take their time when it comes to actually allocating the charitable funds.
Because donor advised funds offer so much flexibility, they are becoming increasingly popular. Whether you choose to gift cash or assets to the fund, you receive your tax credit right away. The funds, of course, are inaccessible to you once you add them to the fund, but you can take your time with allocating them to non-profit organizations so that you provide a meaningful gift in accordance with your desires.