A Donor Advised Fund (DAF) is a charitable investment account for you to support charities that you love and care about. You can contribute assets to a DAF and receive preferential tax treatment. Many different assets, including equity compensation, can be donated to a DAF.
How a DAF Works
The assets are invested and then the money is donated to a charity of the donor’s (your) choice. Once you donate the assets to a DAF, you cannot take them back. It is permanent. There are other characteristics of DAF’s, such as:
- Assets in DAF are invested and the gains are tax exempt
- You can contribute additional assets in the future
- DAFs can donate to tax-exempt organizations including scientific, educational, and medical charities
Benefits
A DAF has immediate tax benefits. When you contribute assets, you receive a tax deduction in that year. You can align this with a high income year when you need a deduction.
When it comes to disbursing money to charities, you can do that in later years. So you decide what year you get the tax deduction as well as when you give the money away to your favorite charities.
Tax Considerations
You also get a lot of tax benefits with this vehicle. When you give away stocks, mutual funds, and other assets, you may receive a tax deduction up to 30% of your adjusted gross income (AGI) for the tax year.
If the amount of your donation exceeds 30% of AGI, you can carry the deduction forward for as long as five years.
When you donate cash, you can usually deduct up to 60% of your AGI.
You get the tax deduction in the year you donate to the DAF. So it can be used as a method to offset a windfall year when you’ve exercised NSOs, exercised and sold ISOs in a disqualified sale, or have a large vesting of restricted stock. Perhaps 2024 was like this for you.
What questions do you have about DAF’s?