US law lets wealthy people get substantial tax deductions if they donate to charitable organizations.
If you’re really, really rich, your income tax can run into tens or even hundreds of millions of dollars. Charitable giving is recognized as a public good, and so the US government rewards donors by slashing their tax bills – sometimes, in the right circumstances, almost completely. It can even work out more beneficial in the long run to donate assets to charity than it can to sell them.
But giving to charity on this scale, and properly reporting those donations to the tax authorities, can be complicated. Enter donor-advised funds, or DAFs, a type of private account through which Americans can secure those tax breaks quickly – without actually having to give directly to good causes.
Setting up a DAF lets a donor claim the benefits of charitable giving immediately, while allowing them to take their time recommending where the money should ultimately go. They were originally intended to make charitable giving easier and thereby encourage more people to do it.