Charitable Planning Series: Donor Advised Funds

A Donor Advised Fund or “DAF” is defined as “an account at a sponsoring organization, generally a public charity, where an individual can make a charitable gift to enjoy an immediate tax benefit and retain advisory privileges to disburse charitable gifts over time.”  But what does that mean in practical terms?

You can set up a “DAF” through a financial adviser or directly with some charities, and like giving to a charity itself, simply deduct that gift on Schedule A of your 1040 tax return.  However, many people under the new tax code no longer file a Schedule A.  Many people give to charities every year, and report those donations to the accountants.  However, since the new standard deduction is $12,000, $24,00 for a couple filing jointly, they no longer receive a tax benefit for those donations.  This is why a “DAF” can be such a great tool though, because it allows a person to make as large a donation as needed to get them above the standard deduction for the current tax year, but then slowly release the funds to the charities they choose over many years.

Example: Mary and John give $6,000 a year to their church.  With other deductions like mortgage interest and medical expenses, they had $21,540 in total Schedule A expenses.  Their standard deduction was $24,000, so it did not benefit them from a tax perspective to have given the $6,000.  Not wanting to miss the value to themselves for being charitable, they instead set up a DAF with their financial advisor.  They then put $35,000 in the account.  Now they have $50,540 in schedule A expenses and can receive a large tax break on the current return.  However they will still only have $6,000 sent to their church each year from the fund. This way they do not give more than they intended, but will receive a tax break well beyond the standard deduction.