Although private foundations require minimum annual payouts of at least 5%, donor-advised funds (DAFs) are not subject to this requirement. As a result, donors can decide how much they wish to contribute to different causes over time and can act only when there’s a cause they want to support. This can benefit people who choose to donate during a financial windfall year.
There can be substantial tax consequences when you sell a business, accept an inheritance, experience strong stock market returns, or encounter any financial windfall. When you make a charitable contribution to a DAF, you can decrease your tax liability and limit the financial load your windfall could cause. Donating a part of your windfall or other assets at a suitable time could allow you to pre-fund numerous years of giving to your favorite charities while greatly reducing your tax bill for the year the windfall was acquired. Again, a tax professional can help you determine the most tax-efficient strategy for your circumstances.
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