Definition: Donor-advised funds (DAFs) are charitable giving vehicles sponsored by a public non-profit organization that allows an individual to make a contribution to the non-profit for tax relief purposes.
What Does Donor Advised Funds Mean?
What is the definition of donor advised funds? In fact, donor-advised funds are increasingly growing because they offer immediate tax advantages for charity funding. According to the National Philanthropic Trust, donor-advised funds increased by 17% to hit $14.52 billion, while the accumulated charitable assets reached $80 billion.
When people make a donor-advised donation to a non-profit organization, they automatically make a tax-deductible donation to the organization sponsoring the fund. Unlike private foundations that pay 1% to 2%, DAFs are less regulated and not subject to excise tax when the donation involves appreciating assets.
Let’s look at an example.
James and Susan are passionate about the arts. James is a painter and Susan is an art teacher at an elementary school. Five years ago, they established a donor-advised fund to support their cause, and they work closely with the staff of a community foundation located in their area to find out about arts programs and charitable benefits that take place annually. Also, because James and Susan have set up a donor-advised fund, they are allowed to designate the community foundation on how to grant the money out to their favorite charities.
The cost of establishing a donor advised fund was $3,000, and both James and Susan will receive a tax deduction between 30% and 50% of their adjusted gross income (AGI) because they are making a cash contribution to support the causes they are most interested in. If in the future, they are no longer interested in funding certain art projects, they can pass on the tradition of donor-advised fund to their children. Alternatively, they can designate their DAF to support a specific charity in perpetuity.
Define Donor-Advised Funds: DAF means a separate fund owned by a public charity that individuals can donate to and receive a tax deduction.