It’s the season for giving, and one of the best vehicles for giving is a donor-advised fund. A donor-advised fund (DAF) gives you a tax break, avoids the hassles of a private foundation, and offers a flexible giving timeline. Read on to learn how to use this charitable giving vehicle in your philanthropy.

How a DAF Works

You can open a DAF account with a third party, usually called a sponsoring organization or sponsor. A number of sponsors operate donor-advised funds, including community foundations, public foundations, and financial institutions, such as Schwab or Vanguard.

You can open this tax-advantageous account by donating a certain amount specified by the sponsor (some DAFs don’t have minimum amounts) and then contribute to the account on your schedule. You can also make charitable gifts to 501(c)(3) organizations on your schedule, a feature that many people like.

Donor-Advised Fund Pros

A primary advantage is the ease of using the account. The sponsor does the administrative work for you—you face none of the hassles that running a private foundation presents.

You also receive an immediate tax deduction for your contributions even if you distribute those contributions in a later year. And you don’t have to give just cash. Many DAFs accept donations of stocks, bonds, real estate, cryptocurrency, and other assets. This means you can give appreciated securities directly to the fund and avoid the capital gains tax you would incur if you sold the securities first and then donated the proceeds.

You can deduct up to 60% of your adjusted gross income for cash donations and 30% for appreciated stock. With a private foundation, you can only deduct up to 30% of your cash gifts and 20% of your appreciated stock donations.

Donor-Advised Fund Cons

If you have a private foundation, you maintain control of your ability to donate to the charities of your choice. With a DAF, you lose the ability to direct who gets your charitable donations.

Instead, you advise the sponsor on which charitable organizations you want to support. Funds generally honor such requests—after all, they want your contributions to continue. But it’s important to note that they don’t have to follow your request.

You also face annual administrative costs, and your donations are irrevocable. You won’t be able to withdraw your contributions later.

DAFs and the Bunching Strategy

After the Tax Cuts and Jobs Act of 2017 made the standard deduction the norm for most taxpayers, the “bunching” strategy became popular. And DAFs became an ideal vehicle for this strategy.

As a charitably inclined person, you can bunch together two or more years’ worth of donations into one year so that you can itemize your tax return. Then you repeat the process every couple of years.

Since a donor-advised fund allows for giving to charity gradually, many people have incorporated it into their bunching strategy. Say you regularly support a local nonprofit, but you don’t want to give them two years’ worth of donations at one time. By contributing to a DAF, you can give to that charity on your usual schedule via the DAF.

Potential Change on the Horizon

Some analysts and lawmakers have criticized DAFs because contributions can remain in the fund indefinitely. To address that, Senators Charles Grassley and Angus King introduced the ACE Act in June. ACE stands for Accelerating Charitable Efforts, and the proposed rules aim to accelerate gift giving through a series of changes.

Briefly, DAFs would be classified as qualifying or non-qualifying donor-advised funds. Depending on the type of fund, your deduction would not take effect until the donation is distributed or the sponsor sells the asset for cash. In some cases, your advisory privileges would expire 14 years after making the contribution.

It is important to remember that the ACE Act is not a law yet, and the provisions are likely to change. You can read about the proposed rules in this Reuters article.

As the proposed changes stand now, our wealth management firm in Plantation, Florida, believes DAFs can be an ideal way to support your favorite public charities. If you have questions about the potential impact of the ACE Act, consider talking with your financial advisor or tax professional.

The DAF and Your Financial Plan

A donor-advised fund can help simplify your gift giving, avoid administrative hassles, and receive a tax deduction for your contributions. But you lose the right to withdraw your contributions, and you face administrative costs. You also do not control who receives your gifts, retaining an advisory role instead.

Depending on your financial situation and values, a donor-advised fund may be an ideal way to express your generosity. If you are uncertain if it’s the right strategy for you, consider talking with a fee-only financial advisor.

Our fee-only, fiduciary financial planning firm helps clients determine their ideal giving strategies as part of their comprehensive financial, tax, investment, retirement, and estate planning.

Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.