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What is a donor advised fund?

November 6, 2020

It’s the beginning of the holiday season, and the urge to give back is strong. If you’re thinking about how to give money to worthy causes this season, you might want to consider a donor advised fund, or DAF. This is a low-cost giving vehicle that helps you give to charity, and the best part? You receive substantial tax advantages when you do. It’s sort of a DIY philanthropy approach and it’s becoming more and more popular as people discover the benefits of this route versus traditional giving. In fact, it’s the fastest-growing way to grow your charitable dollars. In 2018, the amount of dollars in donor-advised funds was $23.42 billion, and donor-advised funds continue to increase, totaling 12.7% of individual giving in 2018, up from 10.5% in 2017.

What makes a DAF different?

Donor advised funds are unique in that you don’t have to be a mega-millionaire to make a big contribution. You can open up a donor advised fund with a contribution as little as $5,000 and receive instant tax deductions. Although $5,000 may sound high, compared to setting up a traditional foundation – which costs a minimum of $250,000, DAFs offer a low-cost alternative to those interested in giving wealth, over time.

DAFs come in handy when it comes to a big tax season. If you sell a business, receive a large sum of money from an inheritance, or have a record year in the stock market, a DAF can help offset those gains and reduce your tax liability and give you instant tax reductions. 

Of course, the other wonderful thing about donor advised funds is that they give you the freedom to support your favorite charities over time. 

How do I get started with a DAF?

You can start with just $5,000 and fund your DAF with cash, stocks, and even cryptocurrency. Keep in mind that once you place money in the donor advised fund, they are non returnable, meaning you will never get that money back. 

The upside? While you decide who you want to give your money to, your money grows within the fund, tax-free. You can also deposit more money into your DAF over time, offering you a way to grow your money in a tax-advantaged vehicle.

What are the pros of a donor advised fund?

Have you ever made a contribution to a nonprofit and received a barrage of mail and emails asking for more donations? Due to the unique nature of DAF giving, most organizations can’t trace the funds back to a donor. This is ideal if you want to remain anonymous and support your favorite charity from a distance, protecting your privacy and your email inbox.  Of course, if you want to make it known to the charity that you are the gift giver, you can contact the organization and let them know you made a contribution.

Below are some positives of opening up a DAF:

  1. You can take your time to vet which organizations you want to support.
  2. You can support any IRS-qualified public charity with grant recommendations from your donor-advised fund.
  3. You can determine your DAF advisors, successors, and which organizations your money goes to. 
  4. Your contribution grows tax-free.

The “cons” of DAF dollars may include:

Wrap up

The financial benefits of donating to charity are huge, and there are more benefits below the surface. According to a study by Vanguard, charitable giving provides overwhelming health benefits, too.

When asked “why do you give?” respondents in the Vanguard survey said that giving wealth gave them meaningful, psychological benefits including:

By donating to charity, you are investing in your own well being and happiness as well as a deserving organization. To learn more about how to #GiveWealth, download our free 4 week challenge today.

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