Tax Benefits of Donor-Advised Funds

Monday, Jul 15, 2024

High-net-worth individuals (HNWIs) are in a unique position to better their communities by making donations through charitable planning. Donor-advised funds (DAFs) provide a flexible and efficient way for these individuals to manage their philanthropic efforts. By using DAFs, HNWIs can contribute assets, receive immediate tax benefits, and recommend grants to their favorite charities over time. This approach not only maximizes the impact of their donations but also simplifies the administrative burden of charitable giving.

What is a Donor-Advised Fund?

A donor-advised fund (DAF) is essentially a charitable investment account. It allows you to deposit assets into an account where they will be donated to charity over time. The account is managed by a section 501(c)(3) organization, which is referred to as the sponsoring organization. Although you relinquish legal control of the assets when they are deposited into a DAF, you retain advisory privileges over how the funds are distributed.

It is important to note that contributions to a DAF are irrevocable. Once a donation is made, the funds and any appreciation must be distributed to a non-exempt organization.

DAF Tax Deduction Limits

Although DAFs offer immediate tax benefits, they do not serve as a vehicle to completely offset your tax bill. The IRS maintains deduction limits, which depend on the type of recipient organization to which the DAF contributes. Generally, a taxpayer can deduct up to 60% of their adjusted gross income (AGI) for cash donations and up to 30% of their AGI for non-cash donations that are held for more than one year. If the deduction amount exceeds the tax-payer’s AGI limit, the remainder can be carried forward for up to five additional tax years.

Tax Benefits of Donor-Advised Funds

Contributions to a DAF offer several tax benefits, including tax-free growth, controlling capital gains on appreciated assets, and lowering estate tax liabilities. These benefits make DAFs an attractive option for donors looking to optimize their charitable giving while receiving favorable tax treatment. Understanding these benefits can help donors maximize their impact and plan their philanthropic strategies effectively.

Tax-Free Growth

Assets contributed to a DAF can grow tax-free, meaning that any investment income or capital gains generated within the DAF are not subject to taxes. This allows the funds to potentially grow more quickly than if they were held in a taxable account, increasing the amount available for charitable grants.

Mitigate Capital Gains Taxes

Donating appreciated assets, such as stocks, to a DAF allows donors to avoid paying capital gains tax on the increase in value. This means that the full fair market value of the assets can be donated, providing a more significant charitable gift and a potentially larger tax deduction.

Reduce Estate Tax Liabilities

Contributing to a DAF can also help reduce estate tax liabilities. By transferring assets to a DAF, donors remove those assets from their taxable estate, significantly reducing the value of the estate and, consequently, the estate tax liability. Additionally, donating to a DAF allows donors to support their charitable interests and create a lasting legacy while benefiting from the associated tax advantages.

Unlock Your Charitable Potential with 5280 Associates

Donor-advised funds (DAFs) offer numerous tax benefits that make them an attractive option for high-net-worth individuals looking to maximize their charitable impact. From tax-free growth and controlling capital gains to reducing estate tax liabilities, DAFs provide a flexible and efficient way to manage your philanthropic efforts. By contributing to a DAF, you can enjoy immediate tax deductions, avoid capital gains taxes on appreciated assets, and ensure your charitable contributions grow tax-free over time. 

 

At 5280 Associates, our expertise in managing donor-advised funds ensures that your charitable giving is both impactful and compliant with all relevant laws. We take the guesswork out of philanthropy, providing personalized guidance and support every step of the way. By partnering with us, you can take full advantage of these benefits while supporting the causes you care about most. Together, we can unlock your charitable potential and create a lasting legacy for future generations.

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