According the Giving USA Foundation, in 2019, Americans gave $450 billion to charity, compared to $427 billion in 2018, two-thirds of which came from individuals in both years. If you are charitably minded, Donor Advised Funds (DAF) offer an efficient way to make financial gifts.
A DAF can be established at any number of institutions, including community foundations, fund companies, brokerages, and universities. Minimums will vary but can go as low as $5,000. When you set up your own DAF, you will name it and determine how the funds will be managed. The DAF provider will charge fees which can include administrative and investment expenses.
Funding is easy. You make an irrevocable contribution of personal assets, which can include cash, stock, real estate and more. You will immediately receive the maximum tax deduction allowed by the IRS. Your contribution can be invested and grow tax-free. Grants from your DAF can be made any time of your choosing, though many DAF providers mandate some minimum level of giving, such as $50 every three years. Following are just three reasons why using a DAF to direct your charitable giving is so useful.
In the 2017 Tax Cuts and Jobs Act, the standard deduction was increased for both single and married tax filers: to $12,200 and $24,000, respectively. For those whose annual giving may not exceed the standard deduction, they can consider a ‘bunching’ strategy. This entails considering giving plans for two or more years ahead.
For example, a couple is planning to give $15,000 to a broad array of organizations, an amount too small to earn tax benefits because it does not exceed their standard deduction. However, they have the resources to contribute two years of contributions, or $30,000, to their DAF during the year. They can make that contribution now and enjoy a $30,000 deduction instead of the standard $24,400. Then, they can grant the funds as they wish over the following two years.
A DAF can be used to help avoid certain taxes altogether. For example, you have assets whose market value reflects a significant unrealized gain. You would prefer to sell these assets but are reluctant to realize the gain and pay taxes. You also have gifting plans over the next few years that could be satisfied by this sale. You can contribute these appreciated assets to your DAF, enjoy the tax deduction immediately, avoid the capital gains tax and initiate the grants at your discretion.
Support Estate Planning
A DAF can help manage legal costs and reduce complexity associated with estate planning. Instead of listing each charity in your legal documents and risking the need to update legal paperwork over time, you can identify your DAF as the recipient of any charitable funds. You would then leave instructions with your DAF as to how those charitable funds should be distributed. These instructions can be adjusted over time as your charitable intentions change.
A DAF can benefit you in many ways; contribute now to lower your taxable income for 2020.