For many of my clients, a meaningful part of their financial plan is charitable giving. Being financially stable enough to use your resources to give charitably is truly a gift. Once you reach the point in your financial journey when you are considering how charitable giving fits into your financial plan, you have many options – one being a donor advised fund.
Giving through a donor advised fund (DAF) is the most tax-advantageous, strategic, and powerful way to give back. As the donor, you have control of where and when the funds are given to charity.
Is a Donor Advised Fund Right for You?
The holiday season is the ideal time to put a strategy in place to help you make the most of your donations. First, you need to determine your goal in your charitable giving, then create a plan. This is where working with a trusted financial advisor can be a great tool.
While giving to charity can be its own reward, giving strategically helps you to minimize your costs and maximize your charitable impact. Once you move funds to your donor-advised fund, you may claim a tax deduction immediately if you are itemizing.
You may opt to contribute cash to your donor advised fund, securities, illiquid assets such as real estate, or even life insurance. Once you determine the amount you would like to start the account with, your donation is final – there is no reversing the decision once the money is in the account. You can also add to the account over time.
Consider strategic charitable giving when you:
- Want to make a large charitable gift to offset your tax liability
- Intend to make numerous and substantial charitable gifts upon your death
- Typically claim the standard deduction
- Want to retain control of the timing of the charitable distribution
How Does a Donor Advised Fund Work?
A donor advised fund (DAF) could be best described as a charitable investment account that provides simple, flexible, and efficient ways to manage charitable giving. The money or assets that go into a donor advised fund are an irrevocable transfer to charity with the specific intent of funding future charitable gifts. This public charity serves as the “administrator” of the DAF.
Here are the four basic steps for how it works:
Step 2: Fund it (i.e., move money - either cash or investments) into the DAF. There is usually a minimum amount you must commit to putting and keeping in your DAF, anywhere from $5,000 to $25,000. You immediately receive the maximum tax deduction allowed by the IRS.
Step 3: Name your DAF account, advisors, and any successors, or charitable beneficiaries. You can continue to invest the assets or leave a portion in cash for immediate donations.
Step 4: Request that the DAF “grant” cash from the DAF to your chosen charities, on your own timetable.
Important Considerations when Choosing a DAF
There are some important considerations beyond the basic steps listed above. Here are two that I see most often:
You want to give a bunch of money in one year, for tax purposes, but you don’t want to distribute it to charities just yet.
Maybe you sold your company this year, or you participated in a tender offer, or something else happened that means your income and tax rate are really high. That makes it an ideal year, from a tax perspective, to donate to charity!
But maybe you don’t know which charities you want to give to. You want more time to figure that out. (Good on you! Philanthropy is a learned skill.)
You want to cultivate a family approach to philanthropy.
Donor Advised Funds can enable you to optimize your tax planning while simultaneously leaving a legacy of giving for your family. For example, DAFs might make it easier to involve your whole family, especially kids and grandkids, in crafting a family philosophy around philanthropy.
A DAF that can support multiple years – maybe an entire lifetime – of charitable giving can create a “bigger,” more permanent and organized sense of philanthropy than just your one-off contributions to your friend’s charitable fundraiser.
When are Donor Advised Funds a Good Choice?
To help you frame the decision regarding whether a donor advised fund is right for your situation, I’ve incorporated this flowchart that will help you walk through major decision points.
If the idea of a donor advised fund is appealing to you, let’s have a conversation. Click here to access my calendar, and we can get a meeting scheduled. I’m looking forward to helping you assure your charitable giving goals are met!