Charitable Giving through a Donor Advised Fund
A Donor Advised Fund (DAF) is a specialized account for designed to facilitate charitable giving. A Donor Advised Fund is a valuable tool to consider for anyone who is charitably minded as it provides a number of benefits such as tax deductions, tax-free growth, and charitable flexibilitye
What is a Donor Advised Fund and How Does it Work?
Donor advised funds have become increasingly popular in recent years as a way for individuals to manage their charitable giving. These funds allow donors to make a contribution of cash or appreciated assets to a public charity, which then establishes a separate account in the donor’s name. The public charity, typically a large institution like Schwab Charitable (more on that below), acts as the custodian for the account and manages the tax reporting, investment selection, and other administrative duties. The donor can then recommend grants to other charities from their account. In a way, the public charity is just a flow through charity that funnels investments to other charities.
Benefits of A Donor Advised Fund
- Immediate Tax Deduction: When you contribute to a DAF, you are eligible to receive an immediate tax deduction for the charitable donation. The tax deduction is an itemized deduction against your income, provided you qualify to itemize. As with other charitable donations, the deduction can be limited based on income and the type of investment donated.
- Tax-Free Investment Growth: Growth on money within the DAF are not subject to ongoing or future taxation. This means the DAF can benefit from greater growth because it does not have a tax drag. If you fund a DAF over a long period, the tax savings can add up to benefit the ultimate charities they will be given.
- Capital Gains Elimination: When you contribute an appreciated investment to a DAF, not only do you get the tax deduction for the value of the investment, but the embedded capital gains also disappear!
- Charitable Bunching: With the higher standard deduction, fewer people end up itemizing, which means charitable donations do not have a tax benefit. However, if you are able to group multiple years’ worth of donations into a single year, you can overcome the standard deduction hurdle and save taxes in the current year.
- Flexible Donations: DAFs offer a lot of flexibility when it comes to funding a DAF and to distribute it to charities. Donations to charities can be to one, or multiple charities and using a variety of frequencies such a monthly, quarterly, or annually.
- Legacy Giving: Upon your passing, you can name an heir to take over as the grant maker giving heirs a unique opportunity to discover the joys of giving.
- Complex Asset Handling: Small charities do not have the resources to handle donations of complex investments and may even only be set up to accept cash donations. The DAF can act as an intermediary between you and the charity to handle more complex donated assets for the benefit of the charity.
- Cost: Compared to charitable trusts or foundations, DAFs are a relatively cost-effective way to give.
What can you donate to a Donor Advised Fund?
One of the primary benefits to a Donor Advised Fund is the number of different assets that can be donated to it. While a charitable organization might not be able to facilitate a donation of certain investments, a Donor Advised Fund might be able to. Each Donor Advised Fund has its own limits on what it can and cannot accept so comparing providers is critical especially if your intended donation is other than the Traditional Securities below.
Here is a list of what can be donated to a Donor Advised Fund:
Traditional Securities
- Cash
- Publically Traded Stocks
- Exchange Traded Funds
- Mutual Funds
- Bonds
Private Interests
- Private C-Corp Stock
- Private S-Corp Stock
- LLC & Limited Partnership Interests
- Private Equity
- Hedge Fund Interests
- Pre-IPO Shares
Other Assets
- Real Estate
- Restricted Stock
- Life Insurance
- Cryptocurrencies
- Retirement Asset
- Oil & Gas Royalty Interests
- List Item
Restrictions in a Donor Advised Fund
Irrevocable Donation
Any gift to a donor advised fund is irrevocable, meaning it cannot be undone. When you donate cash, stock, or other interests, once the funds are in the DAF, they must remain there until distributed to a charitable organization. Because of this, making a contribution to a DAF should be considered carefully, as you will receive no further economic benefit from the funds.
Some "Charitable" Causes May Not Qualify
Charitable Grants from the DAF can only be made to qualified 501(c)(3) organizations. While the number of charitable organizations eligible under the 501(c)(3) rules is quite broad, there are some notable exceptions to this where funds in the DAF cannot be distributed. Giving money directly to an individual in need, missionaries, dues for charitable organizations like Rotary, and tickets to charitable events are all examples of good causes that do not qualify under the DAF rules.
How to Choose a Donor Advised Fund
Since a DAF is irrevocable, it is important to make a good decision as you will have to work with the decision for as long as the DAF is funded. There are five primary considerations when choosing a DAF:
- Quality of the organization: Once donated, the assets are part of the public charity itself and no longer yours. You want to choose a DAF provider who operates in a manner that is consistent with your views and is fundamentally sound.
- How much you have to donate: The larger your intended donation, the more you will likely benefit from using a DAF because you will maximize the amount of tax benefits obtained through the DAF. If you are only looking to donate a little, you may only receive a small benefit or no benefit at all in using a DAF. If there isn’t a benefit, you might as well keep your finances simple and forgo the DAF.
- Who you want to donate to: As mentioned above, there are many charitable organizations that qualify to receive donations from a DAF. However, if your primary giving is intended to be to non-public charities, a DAF would not be appropriate.
- What assets you are donating: While most DAFs accept the more basic investments, there may be restrictions around which DAF providers will accept more complicated investments.
- Cost: The cost to administer the DAF and the cost of the underlying investments should be considered. For every dollar of cost, there are fewer dollars ultimately going to your charitable organizations.