Have you ever wondered how you can ensure your charitable contributions have a lasting impact? What if you could streamline your charitable giving while maximizing tax efficiency? If you want to make a difference while also making savvy financial moves, a Donor-Advised Fund (DAF) might be the solution you're seeking.
A DAF is a kind of charitable investing account that you can use to fund causes that are important to you. Contributing to a DAF at a public charity carries tax advantages for recommending grants to IRS-qualified public charities at your discretion. Nonprofits ranging from your local food bank to large philanthropic organizations benefit from these contributions. [1]
Because of the flexibility and favorable tax treatment under the US tax code, DAFs have emerged as one of the most popular and fastest-growing charitable giving vehicles in the country. Here’s why, what you should know about DAFs, and how to determine if this option is right for you.
How a DAF Benefits You
A Donor-Advised Fund offers key advantages to enhance your charitable giving strategy.
Immediate Tax Advantages and Tax-Free Growth Potential
From a tax perspective, DAFs provide immediate tax deductions for contributions, which potentially reduces your current year's tax liability. Donating through a DAF opens up possibilities beyond cash contributions, often offering greater tax advantages. DAFs typically accept a wide range of assets, including securities, restricted stock, private equity interests, and even cryptocurrencies.
Cash donations may qualify for an income tax deduction of up to 60% of your adjusted gross income. Donating long-term appreciated assets can provide a deduction of up to 30% of your AGI while potentially eliminating capital gains tax on the assets.
At the same time, the funds within your DAF can grow tax-free, which potentially increases the total amount available in the fund for future charitable grants, expanding the impact your money makes. [2]
Flexibility in Maximizing Your Impact
Another valuable feature of DAFs is flexibility. It offers the ability to donate to multiple charities over time, rather than limiting you to a single organization. This means you have the opportunity to support a variety of causes that align with your values. Not only that, but you have the freedom to choose the timing of your donations, enabling you to give strategically, when it makes the most sense for your financial situation or when charities have the greatest need.
It’s also possible to incorporate donor-advised funds into your legacy planning, which allows you to support multiple charities through a single bequest, potentially reducing estate taxes. Alternatively, you have the option to pass the remaining funds to heirs or designate charitable beneficiaries through a succession plan.
Streamlined Record Keeping
Another benefit of DAFs is that the vehicle simplifies record keeping for your charitable activities. Instead of tracking multiple donations to various organizations throughout the year, you only need to manage your contributions to the DAF. This streamlined approach to tracking and managing charitable contributions can save time and reduce complexity, especially during tax season.
Structuring and Funding a DAF Account
Structuring and funding a Donor Advised Fund (DAF) account is a simple, straightforward process.
Open an account with a sponsoring organization, such as a financial institution, community foundation, or charitable organization that offers DAFs.
Once the account is set up, you can fund it with assets like cash, stocks, or other appreciated assets.
The assets in the account can then be invested, allowing them to grow tax-free over time. This growth can increase the total amount available for future charitable donations.
You recommend which charities receive grants from your DAF, though the sponsoring organization has final approval.
This flexible structure allows you to take a long-term, strategic approach to your philanthropy.
Unlike private foundations, donor-advised funds offer a more straightforward and cost-effective option for charitable giving with fewer administrative burdens and tax regulations. Again, DAFs also provide immediate tax benefits, flexibility in grantmaking, and require no separate tax filings or legal upkeep.
Roles and Responsibilities in Donor-Advised Funds
Donor-advised funds (DAFs) were created, in part, as a way for charitable giving to be managed efficiently and effectively. To this end, they’re designed to operate with a clear structure of roles and responsibilities, involving three key parties: the client (you), the financial advisor, and the charitable organizations.
Your Role
The client, as the donor, plays a central part in the DAF process. Your primary responsibility is to select the beneficiary organizations and determine how the funds will be distributed. This means you’ll get to enact a comprehensive giving strategy that outlines the timing, amounts, and recipients of charitable grants.
Your decisions and input ensure donations align with your personal or family values and philanthropic goals. And you have the flexibility to adjust your giving strategy over time, responding to changing priorities or emerging needs in the charitable sector.
Your Financial Advisor’s Role
As financial advisors, we serve as facilitators and managers in the DAF process. Our responsibilities begin with opening the DAF account on behalf of our clients. Once established, we manage the investments within the account, with the goal to grow the assets and potentially increase the funds available for charitable giving.
Financial advisors also play a key role in facilitating the movement of funds to selected charities, ensuring that grants are processed according to your wishes. We bring our knowledge and experience to the table to position the account for strategic and impactful giving.
The Charitable Organization’s Role
Charitable organizations are the ultimate recipients of DAF grants. Their role begins with providing the necessary information to receive the donations from your fund, including their tax-exempt status and organizational details. Once the organization receives a grant, they’re responsible for acknowledging the gift, which is important for your record-keeping as the donor.
Central to the philanthropic agreement, we all trust organizations to utilize the funds in alignment with their stated mission and the donor's intent. So, it should go without saying that they bear the responsibility of translating the financial contributions into tangible impact.
Is a Donor-Advised Fund Right for You?
Determining if DAF is right for you depends on your personal goals and financial situation. As we’ve seen, DAFs offer flexibility, tax benefits, and simplified management of charitable giving. However, it's essential to ensure this approach aligns with your circumstances and philanthropic intentions. Consulting with a financial advisor can help you explore DAFs and compare this vehicle with other giving strategies to find the best fit for your needs. Your advisor can provide valuable insights into managing a DAF account and optimizing the impact of your donations.
Thoughtful planning is key to making your philanthropy both meaningful and financially effective. By carefully considering your options and seeking professional guidance, you can create a giving strategy that makes a positive difference in the causes you care about while keeping your needs and wishes a priority.
Sources:
1. https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
2. https://www.nptrust.org/what-is-a-donor-advised-fund/benefits/
3. https://www.nptrust.org/donor-advised-funds/faq
4. https://www.fidelitycharitable.org/
5. https://www.uscharitablegifttrust.org/donor-advised-funds.php
The Hatlestad Group is an independent wealth management firm based in Edina, Minnesota, primarily serving successful head-of-household women, late-career executives, and pre-retirees. With a tailored approach to fee-only comprehensive wealth management, they empower clients to live out their next chapter with vision, wisdom, and resources, creating a purposeful and meaningful future. They can be reached by phone at (763) 259-3637, via email at info@thehatlestadgroup.com, or by visiting their website at thehatlestadgroup.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.