What is a Donor Advised Fund and why would I want to know about it?"

So you've read my first blog post and decided that you do want to support the SWCA Foundation and probably some other local non-profits as well and you want to know how a Donor Advised Fund works.  Well here is the simple answer: 

 

1. A Donor Advised Fund or DAF for short is a special account you establish with a qualified public charity.  The donor can be an Individual, Corporation, Partnership, Foundation or Trust.  There are many organizations that you can choose from and it is a very easy process.  Think of it as a special investment account that you establish to deposit a lump sum amount that is dedicated to making grants to any charity you want to support at any time in the future.

2. When you deposit the cash or other assets such as appreciated land or stocks or business interests into the account it is eligible for a tax deduction.  If you are contributing assets subject to capital gain tax, then in most cases you avoid paying the capital gain which would be due upon the sale of these assets.  You will want to consult your tax advisor to be sure you understand the details of how the taxes would work in your case.

3. Once the account is funded, you can now recommend the qualified charities and non-profits that you want to receive grants in the future.  This ability to make grant recommendations continues for the life of the donor and future generations can be named to continue the process.  One of these grant recommendations could be the SWCA Scholarship Fund.

4. Additional contributions to the DAF can be made at any time and trigger an additional tax deduction when they are made.

 

An example of when you might use a DAF would be in a year when you have a significant amount of additional taxable income and you want to avoid paying some of these taxes.  These accounts offer a great deal of flexibility so you can decide how to best incorporate them into your own planning.

 

So there it is - you now know what a Donor Advised Fund is and why you would want to use one.  Next time we'll talk about Charitable Trusts and how they are different from a DAF.