‘Tis the season to be scrambling around at the last minute to make your charitable donations. In 2024, you may have benefited from a big increase in your investments and would like to use appreciated stocks or mutual fund shares to donate to charity and get a nice tax break.
But what if you don’t know yet who the ultimate beneficiary of your largesse will be? What if your spouse wants to donate to the Coach Prime CU Buffs Football-And-Rapper Scholarship Fund and you, a stalwart (if ever-disappointed) CSU Ram, are saying, “To hell with that!” This is an argument could go on until next May, but you need to make your move NOW for 2024 taxes?
Well, Donor Advised Fund may just be the answer to your dilemma, allowing you to make your donation now, but kick the ultimate giving can down the road a bit.
A Donor-Advised Fund (DAF) is a charitable giving account that allows people to donate money or assets, get an immediate tax deduction, and decide later which charities will receive the donations.
Here’s how it works, in simple terms:
- Donate now, decide later: You make a donation to the DAF, and the money goes into an account in your name. You can then advise how and when the money is distributed to charities over time.
- Tax benefits: When you donate to a DAF, you get a tax deduction right away, even though you may choose the charities later.
- Investment growth: While your donation is in the DAF, it can be invested, and any growth in the account is also used for charitable giving, without additional taxes.
Here’s how this could work:
Imagine you donate $10,000 to a DAF this year. You can claim the tax deduction now, even if you don’t decide which charities will get the money until next year. In the meantime, the $10,000 can grow through investments within the fund, which means you might end up giving more than your original donation to charities.
Pros of Donor-Advised Funds:
- Immediate tax benefit: You get a tax deduction the year you contribute to the DAF, even if you don’t donate to a charity right away.
- Flexible charitable giving: You can take your time deciding which charities to support and even give in future years.
- Investment growth: The money in the DAF can be invested, which can increase the total amount you can give to charities.
- Easy to manage: The sponsoring organization (usually a financial institution or community foundation) handles all the administrative work, like tracking donations and distributing funds.
- Privacy: You can donate to charities anonymously if you prefer.
Cons of Donor-Advised Funds:
- Irrevocable donations: Once you donate to a DAF, the money cannot be taken back. It must eventually go to charity.
- Fees: DAFs often charge administrative and management fees, which can reduce the amount of money available for donations.
- Control limitations: While you can recommend where the funds go, the sponsoring organization has the final say. (Though they usually follow your recommendations.)
- Delayed impact: Since you can wait years to distribute the funds, the money might not help charities immediately.
Who offers Donor Advised Funds?
- Fidelity, Schwab, and Vanguard are all big providers in this space.
- Your local Community Foundations could offer Donor Advised Funds. Examples in Denver include The Denver Foundation, The Rose Community Foundation, and The Community First Foundation, but there are many others.
- Ask your financial advisor if they can set you up with a donor advised fund.
