A Donor-Advised Fund (DAF) provides opportunities for various strategies when it comes to charitable giving. The basic concept of a DAF is that it’s a separate account, that in some cases can be invested, and is specifically held for charitable giving. All contributions to this fund must be used for charitable purposes to any eligible 501(c)(3) public or private charity. As such, all contributions are eligible for a tax deduction for income tax purposes at the time of contribution. The primary benefit of a DAF is that it allows an individual to donate to the fund today, receive the full tax deduction in the current tax year, and grants can be made at any point this year or in the future. Grants are not required to be distributed in the year of contribution. This allows for what is called “front-loading” charitable contributions. In high income years, an individual can contribute more but still maintain the flexibility to decide which charities to contribute to both now and in the future.
Another strategy with DAFs is through the use of highly appreciated stock. You can gift highly appreciated stock directly to the DAF and capture the whole value for giving in a more tax-efficient way. By doing so it is considered the same as a gift directly to a 501(c)(3) charity, thus avoiding capital gains and income taxes. Consider this example, if you were to gift $10,000 of stock with a cost basis of $5,000, you would save about $750 in capital gains taxes (based on current tax rate of 15% for long-term capital gains). It is important to remember that asset gifts are only deductible up to 30% of AGI but excess amounts can be carried forward for 5 years.