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Giving to causes that are important to you can be a rewarding part of your personal and financial life. One of the most effective strategies is managing your giving through a donor-advised fund, which can help reduce your tax obligation and establish a legacy for you and your heirs.
Donor-advised funds—often simply called DAFs—are public charities that accept irrevocable gifts of cash or long-term appreciated securities from individuals and distribute funds to qualified nonprofit organizations, based on the donor's interest. Depending on whether you donate cash or securities, DAFs can also potentially reduce your income taxes, capital gains, and estate taxes. "Timing your contributions to a donor-advised fund can be an ideal way to maximize your tax savings over the long term," says Christine Fahlund, CFP®, a senior financial planner with T. Rowe Price. "You'll receive an immediate charitable income tax deduction when you contribute to a donor-advised fund,* but you can wait before deciding how to distribute the money in your fund."
MANAGING YOUR CHARITABLE GIVING
If you are unsure which charities you wish to benefit or when you wish to support them, contributing to a DAF can be an ideal choice. Funds not donated simply remain in the DAF—and any subsequent investment returns on your contributions are excluded from your estate and can grow tax-free. This could potentially result in even more money being available to distribute to your charities when you choose to recommend grants.
You can manage your charitable giving through one DAF account, which will provide quarterly statements documenting your account activity. You'll be able to see each of your grants and the amounts awarded to that charity and then decide if you want to continue or change the amount you give. You'll also see any special messages you included with your gifts, such as dedications to the memory of a family member or friend.
DAFs AND FOUNDATIONS: THE DIFFERENCE
A private foundation enables those with significant assets to make a long-term, very public commitment to philanthropic giving. "You undoubtedly have seen instances when a special event was supported by a private foundation in a family's name," Fahlund says. "For many investors, however, there can be drawbacks to setting up a foundation." For example, foundations must distribute a certain percentage of assets and file IRS forms every year, and running one often means incurring financial and legal expenses and making a significant ongoing commitment of time to grant-making responsibilities. Donor-advised funds can also be public—you can be recognized as the donor-advisor or the name of your fund can be included in the grant award letter—but they are much simpler to manage. For a modest fee, the DAF handles all administrative tasks, such as recordkeeping, and you can also recommend that the fund make automatic, regular grants to particular organizations of your choosing—even after your death.
A LEGACY FOR YOU AND YOUR FAMILY
You can add the names of family members to your donor-advised fund account. "Many donors especially like this particular option because it enables them to pass on a legacy of philanthropy to future generations," Fahlund says. "And you can involve younger members of the family in the charitable giving decision-making process."
Donations of long-term appreciated securities to a DAF also provide a tax break, because the capital gains are not realized by the donor. Keep in mind that donor-advised funds may require a minimum initial contribution of $10,000 or more, although future contributions typically can be lower. DAFs involve less paperwork than many other charitable giving options. The simplicity and range of options offered by these funds make them ideal for cultivating a giving tradition in your family.
* You will not receive a second charitable deduction at the time a grant is made from your DAF.