Giving Smarter with Donor Advised Funds

charity daf donoradvisedfund giving goals tax benefit Apr 08, 2022

Giving Smarter with Donor Advised Funds

 

A Donor Advised Fund is a unique sort of giving vehicle typically managed by a sponsor— such as a community foundation or the charitable arm of an investment fund like Fidelity, Vanguard  or Schwab. A DAF functions as a charitable investment account, with the sponsor making gifts from the DAF based on the donor’s requests. Donors get a charitable tax deduction when they give to a DAF; in exchange, they relinquish aspects of control of the donated funds to the sponsoring institution. For example, the DAF sponsor typically manages the investment of the assets in the DAF, and a DAF holder cannot make a grant from the DAF but rather can recommend a grant, with the sponsor having approval authority.

 

How does it work?

These are great vehicles for tax deductible donations because you can use appreciated assets, which can be appreciated stocks, real estate, art, privately held business interests, IPO stock – and you will get full tax deduction immediately upon donation and you will not need to pay capital gains taxes on these. This is how it works:

 

  1. You open an DAF account – these are easily opened thru the charitable arm of an investment fund like Fidelity, Vanguard and Schwab. They can also be opened thru community foundations or other investment funds.
  2. You get immediate charitable tax deduction benefits for the entire amount you put into the account.
  3. You then advise the sponsor of your account what, where and when to donate – which needs to be to a 501 c 3, and they will donate from your account. The money that stays in that account can be invested and grow, and then can be used for larger donations in the future.

 

Is it right for me?

This is most beneficial for people who have appreciated assets, but can also be helpful if you want to make a significant contribution but aren’t sure yet what organization you want to fund.  You can get the immediate tax benefit and then have time to figure out where to direct it.  It is also a great choice if you want to maximize your impact by growing charitable contributions because your account will be able to grow tax free and you will be able to give greater amounts in the future as well.

 

Can I withdraw funds from a DAF if I need them for personal  expenses? 

No. Your DAF contributions and any income earned from them are irrevocably committed to charitable purposes.

 

Is it possible the sponsor won’t follow my direction of where to make the charitable contribution? 

Typically a DAF sponsor would only decline to make a grant when there doubts about  the grant not complying with IRS regulations—for example, the  grantee is not a qualified 501(c)3 organization or if the gift is inconsistent  with the sponsor’s announced policies—for example, prohibiting grants to  hate groups.   Although you cannot withdraw the funds for your own use, you can transfer funds to another DAF sponsor.

 

Do I receive income from a DAF?  

No, once you place funds in a DAF, any income earned on them must eventually be given to charitable organizations.

 

A few important things to know about these types of accounts:

  1. Some places will have minimum required investments to open the account and all will have account fees.
  2. There has been some controversy and recent legislation pending around these funds, because donors can get tax benefits and then park their money in the accounts and not have the actual donation made. 

 

I personally like to look at flow charts and see numbers to understand this and see what a “win-win” situation looks like in numbers, so here is a totally made up example that I made to show what the difference can be donating appreciated assets directly vs. with a Donor Advised fund. 

 

Example & assumptions:

  • Original cost basis of stock = $5000
  • Fair Market Value = $10,000
  • Federal long term capital gains tax rate: 20%
  • Income tax: 37%

 

Sell stock and donate after tax proceeds

Contribute appreciated stocks to DAF

 

Long term capital gains tax paid

$1000

$0

 

Charitable contribution & Tax deduction

$9000

$10,000

Additional amount to charity: $1000

Tax Savings

$2330

$3700

Additional amount saved on taxes: $1370

 

*The tax savings shown is the tax deduction, multiplies by the donor’s income tax rate (37% in this example), minus the long-term capital gains tax paid.

Note: In this example I used the capital gains tax rate of 20% and Federal income tax rate of 37%, for people in high tax brackets. These rates change and you would need to adapt them for yourself or discuss with your CPA to see how it would work for you.

  

What do you think?  Would this be beneficial to you? The causes you support?

Feel free to reach out with questions!  If you want to learn more, check out my course with lots of ways to give smarter. 

 

Here are some links that could help get you started – if you find these helpful, let me know – [email protected]

 

https://www.fidelitycharitable.org/

https://charitable.schwab.acsitefactory.com/donor-advised-funds

https://www.vanguardcharitable.org/

 

 

Disclaimer:
This information, content and materials on this website is for general informational and entertainment purposes only.  It does not, and is not intended to, constitute legal, financial or tax advice. Information on this website may not constitute the most up to date information.  Please consult your legal, financial or tax advisor for professional advice. 

 

You can be the change you want to see in the world through effective, efficient, and impactful philanthropy. Check out my course, The Physician Philanthropist, for a comprehensive education on and strategy for maximizing the impact of your giving both for you and your causes

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