Maximizing Charitable Giving with Donor Advised Funds

Enhancing Charitable Impact and Tax Savings with Donor Advised Funds

In this guide, we explore the advantages of utilizing a Donor Advised Fund (DAF) for charitable donations, offering you control, flexibility, and potential tax advantages.

What is a Donor Advised Fund?

A DAF is a philanthropic vehicle that allows donors to make charitable contributions, receive immediate tax benefits, and recommend grants from the fund over time to donate to their desired charitable organization.

The Strategic Benefits of Using a DAF

Tax Optimization in High-Earning Years

By contributing a lump sum to a DAF, donors can maximize tax deductions in years when their income and tax rate are highest.

For example, if my goal is to give away $20,000 per year. I can donate 5 years worth of giving, totaling $100,000.

So rather than spreading it out contributing $20,000 into the Donor Advised Found account each year for 5 years, I put one lump sum of $100,000 into the Donor Advised Fund account in one year. What happens?

I receive a current-year tax deduction on the full $100,000. I can invest the $100,000 inside the DAF account and give the funds away over the next five years.

Immediate Tax Deduction and Future Giving

Contributing to a DAF allows for an immediate tax deduction while providing the flexibility to distribute grants to charities over time.

Investing Your DAF Contributions

Funds within a DAF can be invested in alignment with your time horizon and potentially increase the value of your charitable donations over time.

Supercharging Your DAF Contributions

Donating Appreciated Assets

Donating appreciated stocks or securities to a DAF can provide double tax benefits: a deduction for the full current value and avoidance of capital gains taxes.

For example: Let’s pretend I bought $50,000 worth of TESLA stock one year ago and now it’s worth $150,000 today. I receive a tax deduction on the full $150,000 and avoid all capital gains taxes on the gain of $100,000.

This is optimal for three reasons:

I receive a tax deduction on the full amount.
I avoid capital gains on the largest gains in my stock positions.
It allows me to unwind from a concentrated position.

Setting Up and Utilizing Your DAF Fund

Opening a DAF Account

Financial institutions like Schwab, Fidelity, and Vanguard offer DAF accounts. Opening one involves choosing a provider and funding the account with cash, stocks, or mutual funds.

Making Charitable Grants

Once your DAF is funded, you can start recommending grants to qualified charities at your convenience.

Considerations Before Starting Your DAF Journey

Funds contributed to a DAF are irrevocable.

Once the money is moved into the DAF account, you have effectively given that money away.

DAFs are simpler to set up.

Compared to other complex strategies like setting up a foundation, DAFs are far more cost-effective and easier to set up.

DAFs are beneficial for business owners.

DAF strategies can work well for business owners facing increased earning years down the road. For example, business owners navigating a business exit can benefit by using a DAF to reduce their taxes in that year.

Plan Ahead for Maximum Impact

Starting early and consulting with tax professionals or a Certified Financial Planner can enhance the effectiveness of your charitable giving through a DAF.