A donor-advised fund (DAF) is a simple, tax-smart investment solution for charitable giving. DAFs allow for an immediate tax deduction on funds though contributed to the DAF. From there, funds can be invested and managed until a final distribution is made to a charitable organization. DAFs are the fastest-growing charitable giving vehicle in the country because of their ease of use and tax advantages. It is easiest to understand these accounts when looked at in the three stages of their use – We’ll call them GIVE, INVEST, & GRANT.
GIVE – Contribute cash, investments, or other appreciated assets (land, cryptocurrency, private stock, etc.) to the DAF for an immediate deduction. So long as you’ve held assets with embedded gains for a year or more, no capital gains tax is owed on the gift, and the contribution qualifies as a current-year, itemized deduction.
INVEST – Invest your donation, tax-free. Once the funds arrive in the DAF, they can be held, sold, or reinvested in a wide-range of options without tax or penalty. While you are deciding which charities to support and when you want to give the funds, your donation can potentially grow, making even more money available for charities.
GRANT – Support the charities you love. This phase of the process can be done as a lump sum, monthly distributions, or whatever timeline or schedule best fits your and the charity’s goals and needs. You designate “grants” (distributions from the DAF to charity), and checks are issued to the charity on your behalf. These checks can go directly to the cause or be mailed to your address, payable to the charity involved. No tax impact (no deductions, no taxation) takes place here as the tax savings already took place in the “GIVE” phase. Note that charities must be qualified charitable 501(c)(3) organizations, and be classified as a public charity, in order to qualify for grants.
At LIS, we love helping people with their legacy, gifting, and estate planning. While we know that donations are not made simply for the tax deduction, we do want to help you make your financial decisions as tax-efficiently as possible.. Gifting a lump sum for tax planning purposes or when a deduction is needed, and then having the time to evaluate where those funds go, creates flexibility that is often an important component of financial planning.
Our goal is to educate and empower you to do make the best decisions you can for your financial future. If a Donor Advised Fund is a planning tool you would like to learn more about – please call or text us at 641-628-1021 or email us at info@leightonis.com!