A donor-advised fund (DAF) is a popular and flexible way to give to charitable causes while simultaneously benefiting from immediate tax advantages. It allows you to make a charitable contribution, receive a tax deduction in the current year, and recommend grants to nonprofits over time.
How a Donor-Advised Fund Works
When you open a DAF account through a sponsoring organization (such as a community foundation or financial institution), you can:
- Contribute cash or appreciated assets (such as stocks or mutual funds)
- Receive an immediate charitable deduction
- Invest the balance tax-free
- Recommend grants to qualified charities at your own pace
This structure provides flexibility, allowing you to make a single larger contribution for tax purposes now and decide later how to allocate it to your favorite organizations.
What Are The Tax Benefits of a Donor-Advised Fund?
One of the key advantages of a DAF is the potential for charitable giving tax deductions and avoidance of capital gains taxes:
- Appreciated securities can be donated directly, which may eliminate capital gains taxes while offering a full deduction for fair market value.
- Contributions are generally tax-deductible up to 60% of AGI for cash and 30% for long-term appreciated assets (subject to IRS limits).
These features make DAFs especially attractive for high-income earners and those with a significant liquidity event.
Donor-Advised Funds vs. Private Foundations
While both vehicles offer long-term charitable giving solutions, the benefits of donor-advised funds vs. private foundations differ significantly. DAFs are easier and more cost-effective to establish and maintain, while private foundations offer more control, but involve greater administrative burden, ongoing reporting, and minimum distribution requirements. For most families seeking a streamlined and tax-smart approach to philanthropy, a DAF often makes the most sense.
How Foster & Motley Can Help
Donor-advised funds are a powerful tool, but like any aspect of your financial life, they work best when aligned with your overall goals. At Foster & Motley, we help you evaluate your giving priorities, assess your tax situation, and incorporate donor-advised funds into a broader charitable and retirement planning strategy.
Want to make your giving more strategic and effective? Schedule a discovery call to explore how donor-advised funds can enhance your financial plan.
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