Time to Consider a Donor Advised Fund?

A donor advised fund (DAF) is a charitable savings account, a type of charitable vehicle opened with a public charity, often a community foundation.

A donor advised fund (DAF) is a charitable savings account, a type of charitable vehicle opened with a public charity, often a community foundation or an arm of a large brokerage firm. Contributions to a DAF receive a tax deduction at the time of funding, while gifts to your favorite charities from the DAF can be made at a later time.

Year-end is a popular time for charitable giving. The type of gift (appreciated stock or cash from a brokerage account, contributions of appreciated stock to a donor-advised fund, cash gift from an IRA, etc.) should be carefully considered in the context of your overall tax situation. Tax law changes at the end of 2017 add to the importance of a well-thought-out annual charitable giving plan. For example, the standard deduction for a “Married Filing Jointly” (MFJ) status is $27,700 in 2023 compared to $12,700 in 2017. For a single taxpayer, the standard deduction rose to $13,850 in 2023 vs. $6,350 in 2017, so if available Schedule A deductions do not exceed the higher standard amount, charitable gifts are effectively not tax deductible.

“Front-loading” charitable giving through a donor advised fund is one possible solution to preserving the tax benefit of your charitable donations. The concept is straightforward – lump multiple years of charitable donations into a DAF in year one. Aggregating several years of gifts into one year will push the total deductions over the higher standard and allow you to itemize and deduct the full value of the gifts on the front-end, in year one. In subsequent years, giving can be made directly from the DAF. In these years, the taxpayer would use the standard deduction. Alternating itemizing vs. taking the standard deduction will capture the maximum tax benefit in year one while not disrupting the taxpayer’s annual charitable giving plan.

Opening a donor advised fund is an easy process. DAFs can be opened with a local community foundation or through an arm of a brokerage firm offering a national program. Both Charles Schwab and Fidelity Investments offer donor advised funds. Opening minimums depend on the sponsor and usually start with a minimum contribution of $5,000. Low cost-basis (or highly appreciated) securities are perfect charitable giving candidates. The security is transferred to the DAF avoiding capital gains altogether because the DAF is a not-for-profit and therefore doesn’t pay income tax.

A family giving legacy can be established through a donor advised fund. The community foundation endowed model, given its long term approach, unites family members of multiple generations. Community foundations offer assistance in creating a family’s charitable mission statement as well as resources to support a family’s non-profit research. Valuable financial stewardship principals can be learned as younger family members work with parents and grandparents on a common philanthropic purpose. Members of the younger generation can also be named as successor owners of the fund.

Lastly, administration (i.e. paperwork) is consolidated and reduced through a donor advised fund. A tax receipt is generated on the front-end for the gift made to the donor advised fund. From this initial gift, many smaller gifts can be made from the fund, eliminating a slew of tax receipts for the smaller gifts.

Download our whitepaper to learn strategies to help maximize charitable deduction contributions.

Please reach out to your advisor with any questions.

Betsy Cunagin, CFP®, CRPC®
Partner

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