In 2020, an estimated 73% of Americans gave money to charitable causes. Quite frankly, that figure is higher than I anticipated when I began researching this blog post. Even more impressive, that is the lowest percentage of the 21st century (not too surprising given the difficult financial circumstances of the last year). The average figure tends to be closer to the mid-80% range, which means that those who make charitable contributions in the United States represent nearly all socio-economic levels.
Furthermore, any American who contributes to charities is also eligible to deduct those contributions from their taxable income (up to a certain percentage).
So, the question is, “If I am charitably inclined, am I making my contributions in the most efficient and advantageous way possible?” For many, the answer is “no” and using a Donor Advised Fund (DAF) is likely an attractive solution to that problem.
So What is a Donor Advised Fund?
Donor Advised Funds are financial accounts established by either charitable institutions or the charitable arm of financial custodians like banks and brokerage firms. A DAF enables the grantor (you) the ability to contribute lump sums of money, invest those contributions so that they grow, and direct exactly when and how those dollars are distributed over time.
The three greatest advantages of DAFs are their 1) tax benefit, 2) growth potential, and 3) ease of use.
Tax Benefit
Say you regularly make a small contribution to your local animal hospital. The amount you contribute doesn’t provide a significant tax benefit to you each year, but it is very important to you to support that hospital.
With a Donor Advised Fund, you can make several years’ worth of contributions to the fund and receive a tax deduction for the total amount of your contributions. The DAF will also provide all documentation you need to claim your deduction when tax season rolls around.
Ideally, this larger lump-sum contribution provides you with a more meaningful tax benefit. This strategy is especially useful in years when you have greater than normal income and you are subject to a higher marginal tax bracket than you are accustomed to (perhaps due to the sale of a business or real estate, or receipt of a significant performance bonus).
It is important to note that this will be the only time these contributions are tax-deductible. When you later direct the fund to make a distribution to the final charitable destination, you do not again get to deduct the dollars you previously claimed.
Depending on your personal investment holdings, it may also be advantageous to gift highly appreciated stock to your DAF. In this case, the benefit is two-fold: you avoid paying capital gains tax on selling these holdings and you still get an income tax deduction equal to the market value of the contributed stock!
Growth Potential
Once contributions are deposited into a Donor Advised Fund, you control how these funds are invested – even though you no longer technically “own” the funds. Think of yourself as more of the guardian of your contributions at this point.
If you wish to distribute the money from your DAF right away, you can. If you want to invest the money so that your charity of choice receives a potentially larger sum, you are free to do that as well.
Each DAF custodian offers different options for how the funds are held and/or invested, so be sure that the custodian you select offers options that align with your wishes.
Ease of Use
Perhaps my favorite feature is that Donor Advised Funds take all the hassle out of ensuring that your charitable donations end up in the right hands.
With a Donor Advised account, you simply log on to the custodian’s site, select the institution you wish to gift to, the amount, any special designation you would like to include, and hit enter. They handle the rest and even confirm that the institution received the check on your behalf. Typically, DAFs also have the ability to automatically schedule regular gifting (e.g., monthly tithing to your church or an annual gift to your hospital of choice). Some custodians, particularly Charles Schwab, will even go the extra mile to help a new charitable organization you support register for 501c3 status – all you have to do is ask.
Your charitable budget may not be as large as the Bill and Melinda Gates Foundation, but that doesn’t mean there aren’t great resources available to help you execute your charitable wishes in the easiest possible way. If you’d like to learn more about Donor Advised Funds or how charitable giving in general fits into your financial plan, please don’t hesitate to give us a call or send us an email.
