A donor-advised fund is a charitable giving account funded by tax-deductible contributions of cash, stock, or non-publicly traded assets. Contributions can grow through investment, tax-free, until such time as the donor decides to grant some or all of the funds to one or more charities of their choice.
The first thing to know is that contributions to a donor-advised fund are irrevocable. The funds cannot be returned to the donor or any other individual and must be used only for grant making to charities.
Contributions may be in the form of cash, stock, or privately held assets. In fact, many add securities that have grown in value to their donor-advised fund to avoid the capital gains tax they would otherwise face, while also receiving an income tax deduction for the full fair-market value of the asset. Of course you may then grow your account through investment, potentially creating more money for your causes.
When you contribute to a donor-advised fund, you can take an income tax deduction immediately, regardless of whether those funds are distributed to a charity at that time or at a later date. In fact, those who are not able to meet the threshold to claim a charitable deduction in a single tax year could decide to bundle several years’ worth of giving into one year to reach the threshold and claim the deduction.
Private foundations are another type of charitable giving vehicle you may have heard of. While a private foundation requires a 5% annual payout, a donor-advised fund has no such requirement, so assets can remain invested tax-free for an extended period of time.
Donor-advised funds also allow you to name family members as successor advisors on the account, and since gifts made to these funds remove those assets from your estate, they can help reduce the estate tax burden for your heirs.
If you’re looking for wiser ways to support the charities you love, talk with us. We’ll be happy to help you explore different ways to maximize impact on the world around you.
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