What is a Donor-Advised Fund?
Donor-Advised Funds (aka DAFs) are a type of charitable giving account.
What makes a DAF special is that it allows you to realize a charitable deduction the year you deposit money into it, but does not require you to donate the money in the same year. In fact, you can invest the money in a DAF and have it grow tax-free your entire life, and potentially even longer.
DAFs are especially interesting to those who find themselves in a particularly unpleasant income tax year, since when contributing to a DAF — even if you don't at the time know exactly where the money should go — you are granted a tax deduction that year. They can also be used in tandem with Roth conversions as a tax-planning tactic.
However, do note that for a DAF to make sense in your financial plan, you must be a charitably inclined individual. Even though there may not yet be rules on when the money in a DAF must be charitably disbursed, it cannot return to your pocket.
For those of us who intend to donate to charity and have the means to do so, DAFs are very attractive due to the flexibility and ease of use they afford, especially when compared to alternatives such as setting up private foundations (which have strict regulations and transparency requirements).
Some folks use DAFs to capture tax advantages, some use them because they know they want to give but don't know quite yet where they want their money to go, and others still use DAFs to make recurring donations to provide a stable income stream to a charitable institution of their choice.
How can I model a DAF within the Planner?
Modeling a DAF requires a bit of a workaround. It can be modeled in two ways: (I) modeling the contributions to a DAF and their tax advantage, which is easier; or (II) modeling both the contributions to a DAF while also modeling the DAF as part of your net worth.
Note: PlannerPlus features are required to model a DAF
Method 1: Modeling Contributions to a DAF
Step 1: Navigate to My Plan > Expenses and Healthcare
Step 2: Turn on the Planner+ Budgeter
Step 3: Either setup the Planner+ Budgeter or (if already set up) press "Edit ✎"
Step 4: Find the "Gifts and Charitable Donations" Budgeter category
Step 5: Press "Add Expense"
Step 6: Select the Charity subcategory and label the expense something along the lines of "DAF Contribution(s)"
Step 7: Decide the frequency of contributions
Step 8: Enter your planned contribution in both Must Spend and Like to Spend
Step 9: Select 100% deductibility (this is important)
Step 10: Select Start and End dates for the contributions
Method 2: Modeling Contributions to a DAF and Tracking the DAF Over Time
Step 1: Follow Steps 1–10 of Method 1 to model contributions to a DAF
Step 2: Navigate to My Plan > Accounts and Assets
Step 3: Open the Savings section
Step 4: Press "Add an account +"
Step 5: Select the HSA account type
Step 6: Decide to whom the account belongs (if applicable)
Step 7: Select Manual Entry
Step 8: Enter a descriptive account name
Step 9: Enter a current balance
Step 10: Enter Rates of Return
Step 11: Exclude the account from withdrawals (this is important)
Step 12: Navigate to My Plan > Income
Step 13: Open the Windfalls section
Step 14: Press "Add a windfall+"
Step 15: Select the DAF account
Step 16: Fill out the amount as the sum of all DAF contributions within the first year of your planned contributions from Method 1
Step 17: Enter the age that corresponds to the year of DAF contributions in Step 18
Step 18: Select "Other" as the reason
Step 19: Press "Save"
Step 20: Repeat steps 14–20 for all other years you plan to make contributions
If you want to model donations out of the DAF, you can do so using the Disbursements section of My Plan > Expenses and Healthcare.