DAFs have become so popular in part because of their flexibility. Charitable sponsors can often accept different kinds of assets as contributions to DAFs during the donor's lifetime and allow them to use those assets to leave a charitable legacy. DAFs also offer maximum tax advantages, and they can be linked as a complementary vehicle to other financial and estate planning tools, such as charitable remainder trusts, charitable lead trusts, and bequests. Three common uses for DAFs are:
Converting Illiquid Assets into Philanthropic Capital
Some charitable DAF sponsors accept a wide variety of assets as contributions, including illiquid assets. These can include real estate, works of art, collections, and other tangible personal property. In recent years, donating illiquid assets to DAFs has become a more popular trend. Donors are looking beyond their stock portfolios to view their total wealth as potential gifts to charity.
Building a Giving Legacy
Many donors find it important to involve their family in giving. In fact, 30% of high net-worth individuals cite “encouraging charitable giving by the next generation” as one of their top motivators for giving.
DAFs offer a way to involve the family in giving by establishing their loved ones as secondary advisors and successors. Those charitable sponsors that allow successors to assume responsibility for the DAF offer different plans. For example, at National Philanthropic Trust, some donors elect to leave the entire balance of their DAF to one or two successors, often family members, who work together. Others elect to have their assets divided into several new individual DAFs, appointing a successor to each—especially if children do not approach their philanthropy in the same way or live in distant locations.
Donors can also leave testamentary gifts—such as bequests—to their DAFs to ensure a charitable legacy that lasts beyond their lifetime. Before leaving a bequest, donors and advisors should check to see if a DAF sponsor has a spending rule. While some do, other DAF sponsors allow the DAFs to grant out the balance of the DAF in its entirety or a percentage of the assets over time—giving the donor more flexible charitable giving options.
Reducing Tax Burden in a Windfall Year
Because donors receive an immediate tax deduction, DAFs can be a preferred approach to reduce tax burdens after a windfall situation, such as receiving an inheritance, selling a business, or experiencing strong market returns.
If a donor were to liquidate securities and donate proceeds to their DAF, the amount would be reduced by capital gains. This strategy ultimately leaves less money available for philanthropy than if the donor donated the securities directly to their DAF, allowing the charity to sell the securities and enabling the donor to avoid capital gains.