If you give to your favorite charities every year, opening a donor advised fund may be a way to lower your taxes while still supporting the causes that you love. Here’s a quick explanation of donor advised funds and how they can be a great financial planning tool.
What Is A Donor Advised Fund?
Simply put, a donor advised fund (DAF) is a charitable giving account. Think of it as a super-simple alternative to a personal foundation. When you put money into a DAF, you get to itemize your contribution as a charitable donation on your tax return. We’ll get into these details a little later.
Once you contribute money to a donor advised fund, you can choose to distribute all or part of the funds to any 501(c)(3) non-profit you want to support. But once the funds are in the DAF, you can’t take them back! It’s an irrevocable gift.
You also have the option to not distribute the funds immediately if you so desire. You can invest the funds and allow them to grow over the course of years. You can also choose to distribute a portion of the fund annually while the majority of the funds continue growing.
In the past, I’ve helped plenty of clients manage the investments for their donor advised funds. (Yes, you can even have your financial advisor manage the investments.) Some clients have even involved their children and grandchildren in the charitable decisions in order to instill their value of charitable giving in the younger generations.
By the way, gifts to a DAF don’t have to be cash. You can also use low-basis stock, private stock, real estate – even cryptocurrency. This gives you some flexibility when thinking about a tax planning strategy.
Finally, you can even name your DAF! Many families will call it the family charitable fund or family giving fund, but you can get creative if you like.
When Should You Use A Donor Advised Fund?
If you’re not overly charitable, that’s okay – there are better strategies out there for you. However, if you consistently give to important causes every year, then a DAF is something to consider.
It’s important that your charitable contribution is large enough so that you can take advantage of itemized deductions. Back in 2017, the TJCA increased the standard deductions by quite a bit – drastically reducing the number of people who itemized. Be sure to check with your CPA or tax preparer to confirm that this strategy has a tax benefit for you.
One instance where you should consider a DAF is when your income is higher than usual. In order to take advantage of the charitable deductions, you can give a larger amount in a high-income year to a DAF in order to front-load several subsequent years’ worth of charitable contributions.
Another great time to consider a donor advised fund is If you have low-basis stock or some other asset where you’ll owe a lot of capital gains taxes when you sell. You can get both a charitable deduction for funding the DAF and avoid paying the capital gains on the asset that you fund it with. It’s a tax twofer.
Unfortunately, for those of you who are taking required minimum distributions from your retirement accounts, I have bad news. You can’t fund a DAF with Qualified Charitable Distributions. You can still make a distribution of up to $100,000 directly to a charity, but the IRS doesn’t allow this for donor advised funds or charitable foundations.
How Much Can You Contribute?
The IRS does limit the amount of tax deduction you can take for charitable contributions in any given year. Here’s a quick breakdown of the limitations imposed on DAFs
- 60% of AGI for cash gifts and
- 30% of AGI for non-cash gifts
One quick note, however: the CARES Act has increased these limits to 100% of AGI for 2020. So if you’re lucky enough to consider that kind of giving, you have a unique opportunity this year.
Of course, these numbers are subject to change. Check with your CPA to confirm what will work for you.
Where Do You Go To Open A Donor Advised Fund?
Most of the large, brand-name custodians have charitable divisions that offer DAFs. Fidelity, Schwab and Vanguard are popular options. There are also smaller, local foundations that manage donor advised funds as well. Ask your financial advisor or CPA and they can point you in the right direction.
What Questions Should You Ask Before Opening One?
Just like any other account, it’s a good idea to understand the fees associated with a donor advised fund before you open one. There’s usually an annual management fee and there will be expenses for any investments you choose. However, these fees tend to be reasonable given that there’s plenty of competition in the DAF space.
There’s usually a minimum account size required to open a DAF, but it’s probably much lower than you’d guess. In some cases, it can be as little as a few thousand dollars.
Be sure to ask the DAF administrator if there are any limitations on distributions. Is there a minimum dollar amount on your grants to charities? Is there a maximum number of grants you can give out each year? Finally, be sure to confirm that your favorite charities are on the list!
Is A Donor Advised Fund Right For You?
For many people who are charitably inclined, opening a donor advised fund is a wonderful way to get a tax benefit while continuing to support the causes they love.
If you’re looking for someone to help you set up a donor advised fund, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients this year.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.