Top 5 Questions About Charitable Giving Through Donor-Advised Funds

Today, more and more people are choosing donor-advised funds (DAFs) as a simple, tax-effective way to support the causes they believe in. There are programs that make it easy for you to maximize your charitable impact for this generation and the next—while maximizing your tax deductions. You’ll have access to DAFs from premier charitable giving institutions and the investment expertise of your financial advisor. This powerful combination can help you achieve your strategic philanthropic goals and create a meaningful legacy.

1. What Are DAFs?

A donor-advised fund is often considered to be an investment account created for the sole purpose of donating your money to charity. DAFs are administered by a sponsoring organization that agrees to consider your wishes for how funds are invested and distributed. All the money you use to fund the account is tax-deductible in the year you give, and you are free to contribute to it once or at multiple times (a decision typically driven by your tax needs).

2. How Do DAFs Work?

Setting up your DAF can be quick and easy. In many cases, it’s like setting up any other brokerage account. Some sponsoring organizations have rules about the minimum investment amount (usually $5,000 to $10,000) and types of assets you can contribute. While you can always contribute cash and marketable securities, many sponsoring organizations also allow you to contribute life insurance policies, closely held stock or real estate.

3. How Are DAFs Invested?

When it comes to how your donations are invested, a lot depends on the sponsoring organization, because it legally owns and controls the assets you contribute. Some sponsoring organizations allow you to choose investments only from a pre-selected fund menu (similar to how your 401(k) plan might work), while others allow you to develop a customized investment plan with your financial advisor.

Of course, the goal of a DAF is to distribute your money to charity. While legally you will not retain ownership of the funds or control over distributions, sponsoring organizations typically defer to your advice on these matters.

4. What Are the Benefits of DAFs?

DAFs save time and accomplish more. With a DAF program, you simply make tax-deductible contributions when you choose and recommend which charities should receive grants from the DAF in the amount and over the time period of your choosing. You’re not wasting time writing multiple checks and keeping track of every donation. A DAF program can play an important role in helping you establish a charitable family legacy through a streamlined giving process. You just focus on the causes and organizations you love in your community and across the country.

5. What Are the Tax Advantages of DAFs?

As soon as you start making contributions to DAFs, you can expect:

• An immediate tax deduction – Reduce your taxable income for the year of your contribution.
• No capital gains tax – Pay no capital gains tax on the assets you put in your DAF. If you donate appreciated assets that you’ve held for more than a year, such as stocks, you receive a deduction for their fair market value on the date of transfer.
• Tax-free growth – A donor-advised fund can be invested to appreciate tax-free due to the unique DAF structure.
• Deductions when you want – Donate in years when you’d like to have a charitable deduction.
• Simplified tax preparation – Access one consolidated receipt for your charitable contributions.

For more information about DAFs, contact Holly Gulden, Vice President, CentraCare Foundation, 320-240-7884.

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