Turbocharge Your Giving: Navigating the World of Donor-Advised Funds

The holiday spirit and the end of the tax year mean that December is one of the biggest months of the year for charitable organizations.  Approximately 30% of all giving each year happens in December!  Today, we’ll learn about a tool that can help you support your favorite charities, while also giving you flexibility, easier recordkeeping, and an immediate tax deduction.

The tool that I’m describing is known as a Donor-Advised Fund (DAF).  These funds have grown in popularity over the past few years, and for good reason.  They offer a flexible and tax-efficient way for families to positively impact organizations and caused that they care about.  In this post, we’ll explore how donor-advised funds work, their benefits, and considerations for using them effectively in your philanthropic journey.

What are Donor-Advised Funds?

Definition: Donor-advised funds (DAFs) are philanthropic accounts managed by public charities, known as sponsoring organizations, that allow donors to make contributions to the fund and recommend grants to qualified charitable organizations.

How They Work:

  1. Contribution: Donors contribute cash, securities, or other assets to a DAF.
  2. Tax Deduction: Donors receive an immediate tax deduction for their contributions.
  3. Investment: The funds in the DAF are invested, potentially growing over time.
  4. Grant Recommendations: Donors recommend grants to eligible nonprofits from their DAF account.
  5. Distribution: The sponsoring organization reviews and approves grant recommendations and distributes funds to the chosen nonprofits.

Benefits of Donor-Advised Funds

  1. Immediate Tax Deduction: One of the most significant advantages of DAFs is the immediate tax deduction donors receive when they contribute assets. This deduction can help reduce taxable income in the year of the donation.
  2. Simplified Recordkeeping: DAFs simplify recordkeeping for donors. Instead of tracking individual donations to multiple charities, donors can make one contribution to their DAF and recommend grants as needed.
  3. Flexibility: DAFs offer flexibility in choosing when and where to make charitable grants. Donors can take their time to research and decide which organizations to support.
  4. Legacy Planning: DAFs can be established as a legacy giving tool, allowing donors to involve their family in philanthropy and pass down the tradition of giving.
  5. Privacy: Donors can choose to remain anonymous when making grants, providing privacy if desired.
  6. Asset Appreciation: DAF assets can be invested, potentially growing over time, allowing for more substantial charitable contributions in the future.

Setting Up a Donor-Advised Fund

  1. Choose a Sponsoring Organization: To establish a DAF, you’ll need to select a sponsoring organization. I typically help my clients open an account with Schwab Charitable. Reach out to me with questions and I can help move the process forward.
  2. Contribute Funds: Make an initial contribution to your DAF. Most of my clients usually contribute either cash or highly-appreciated securities.
  3. Receive Tax Deduction: Upon contributing, you’ll receive an immediate tax deduction for the fair market value of the assets donated.  This is especially helpful if you have a large tax bill for the current year.
  4. Recommend Grants: You can recommend grants to qualified charitable organizations at any time. The sponsoring organization will conduct due diligence and process the grants. This means that you don’t need to hurry to decide who the eventual recipient of your gift will be for the current tax year. 
  5. Investment Strategy: Work with the sponsoring organization to determine an investment strategy for your DAF’s assets. Perhaps you want to make charitable donations regularly but want to grow your account for a more meaningful gift in the long-term.  This is a great way to build that legacy.

Section 4: Maximizing the Impact of Donor-Advised Funds

  1. Strategic Giving: Take time to research and plan your grants strategically. Identify causes and organizations that align with your values and philanthropic goals. 
  2. Diversify Your Giving: Use your DAF to support a variety of causes and organizations to diversify your impact.
  3. Leverage Investment Earnings: Given that DAF assets can be invested, consider letting your contributions grow over time before making grants.
  4. Collaborate with Family: Involve family members in your giving decisions, promoting a culture of philanthropy across generations.
  5. Long-Term Vision: Establish a clear mission and vision for your philanthropy to guide your grant recommendations.

Section 5: Tax Considerations

  1. Tax Deductions: Understand the rules and limitations of tax deductions associated with DAF contributions. Different types of assets may have varying tax implications.
  2. Minimum Distribution Requirements: Be aware of any minimum distribution requirements imposed by the sponsoring organization.
  3. Avoid Self-Dealing: Ensure that grants made from your DAF do not personally benefit you, family members, or anyone else associated with the fund.
  4. In-Kind Contributions: Learn about the specific rules regarding in-kind contributions and how they affect tax deductions.

Section 6: Common Misconceptions About Donor-Advised Funds

  1. Complete Control: While donors can recommend grants, they do not have complete control over DAF assets. The sponsoring organization ultimately approves and disburses grants.
  2. No Time Limit: There is no time limit for making grant recommendations from a DAF. Funds can remain in the account indefinitely.
  3. Sole Purpose: DAFs are not solely for the wealthy. People from various income levels can establish and contribute to DAFs.
  4. Irrevocable Contributions: Once you contribute assets to a DAF, they become irrevocable charitable gifts.

Donor-Advised Funds vs. Private Foundations

While the descriptions of DAFs sound similar to that of a private foundation, they are far more simple to use for the donor.  Private foundations have more control over assets and grant making, but they also have a far higher administrative burden.  They are their own separate legal entity, and have strict laws and regulations, in addition to requirements for tax filing and record keeping.  DAFs are an easier way to gain some of the benefits of a private foundation, without the administrative headaches.

Success Stories

I started my DAF several years ago when I wanted to simplify my charitable giving.  I found the record keeping tedious, and I loved that I could make a gift of stock at the end of the year, and then spend some time researching the charities that I wanted to support.  Now, when I want to donate, I don’t have to file away the receipt for tax time – I can just login to my Schwab Charitable account and recommend a grant.  It’s been a great way for me to spread my giving throughout the year.

I’ve shared my story with many of my clients, and I’m hearing more and more interest in DAFs as a way to manage charitable giving.  I’ve had a few clients make sizable donations at the end of the year to make the cutoff for taxes, and then find that the grant making process is a more enjoyable way to support their causes.

If you’re looking for a way to easily deduct your charitable giving for the year, and be able to spend more time actually researching and contributing to causes that you care about rather than tracking down receipts at tax time, a DAF may be a solution for you.  Drop me a line and I can help you get one set up!