Donor Advised Funds (“DAF’s”) are an excellent way to achieve your charitable goals. We are big fans of these instruments, especially when funded through donations of appreciated stock. However, tax treatment of donations to and from a DAF are different from direct donations to charities and not all tax preparers are familiar with the strategy. Here are the basics of DAF’s and how they should be treated on your tax return.
Let’s begin with a clear definition. A DAF is a fund that is owned or controlled by a qualified charity. The fund separately identifies donations by donor and allows the donor to ‘advise’ the charity on distributions from the fund.
Thus donors can make a completed charitable gift by making a donation to a separately identified account at the sponsoring charity. Said another way, a donor is eligible for a tax deduction in the year donations are made “to” a DAF.
Therefore, grants “from” the DAF are not deductible – the tax deduction was already received when the donation was made to the DAF. Grants from the DAF must be made to qualified 501(c)(3) charities, but they are not deductible when the grants are made.
This tax treatment is a good thing since it allows donors to be eligible for an immediate tax deduction when the donation is made but choose the ultimate charity at a later date. It also simplifies the paperwork needed for your tax return. You are not required to save receipts for donations ‘from’ the DAF. In fact, donations ‘from’ your DAF should not be reported on your tax return. You do not even have to provide these grants to your tax preparer, dramatically reducing the number of receipts you need to track.
If you have any questions about your Donor Advised Fund, or would like to learn more about how to create a DAF, please give us a call.