Tax Efficient Charitable Giving Using a Donor Advised Fund

The benefits of a donor advised fund

A donor advised fund (DAF) is a charitable fund held by a not-for-profit organization where the donor can contribute cash or appreciated assets and receive an immediate tax deduction while determining how to distribute the funds to charities over time. Funds in a DAF can be invested and grow tax-free until they are used to fund the donor’s charitable goals.

Background 

Setting up a DAF is free. The fund administrator charges a nominal fee, typically 2% or less, which is paid out of the DAF account; and the administrator handles the due diligence, investment fees, recordkeeping, check writing and tax filings. DAFs are available through community foundations, as well as financial service organizations like Schwab, Fidelity and Vanguard. A DAF can be funded with as little as $5,000.

Due to the increase in the standard deduction and the limitation on deductions of state, local and real estate taxes and mortgage interest under The Tax Cuts and Jobs Act of 2017, planning the timing of itemized deductions, such as charitable contributions, can be a tax efficient strategy.

Bunching Charitable Deductions

Using a DAF to “bunch” charitable deductions allows taxpayers to act strategically with their charitable dollars. Bunching means grouping several years of charitable donations into one larger contribution, which combined with other itemized deductions, will increase the likelihood of exceeding the standard deduction and provide taxpayers with additional tax savings. For example, bunching $20,000 of contributions into one year, combined with the state and local tax deduction of $10,000, would result in itemized deductions of $30,000 in one year and the standard deduction of $25,000 in another year for a married couple filing jointly. If the contributions were $10,000 per year, the taxpayer would take the standard deduction of $25,000 each year. Therefore, bunching would result in an additional $5,000 of deductions between the two years.

Donating Appreciated Assets

Cash donations to a DAF are deductible up to 60% of adjusted gross income. A tax efficient gift into a DAF is a gift of appreciated stock or mutual funds that have been held for one year or more. Using appreciated assets for charitable contributions allow taxpayers to deduct the fair market value of the assets as a charitable contribution and avoid reporting the capital gain. Donations of appreciated assets to a DAF are deductible up to 30% of adjusted gross income. Since many charities have difficulty receiving securities as a donation, using a DAF makes it easy for the donor to turn the securities into cash and then distribute the cash from the DAF to the charity.

Other Options

Donors considering setting up a private foundation might find a DAF to be a better charitable vehicle since there are typically high costs associated with private foundations, as well as required annual charitable distributions and tax filings. Additionally, DAFs provide privacy, since gifts from a DAF can be made anonymously where private foundation gifts are public record. Donors can also name their fund to protect them from charitable appeals if they wish.

The Benefits of Utilizing a DAF

Donor-advised funds allow donors to leave a legacy. Involving children and grandchildren in the grantmaking and naming them as successors to the fund can educate future generations about philanthropy. Donors can also designate specific not-for-profits to be supported upon their death by the fund.

If you would like more information about setting up a donor advised fund, please contact your Sikich wealth advisor or other Sikich representative.

Advisory services through Sikich Financial, an SEC registered investment advisor. This is not a solicitation or recommendation to purchase or sell any investment product or service, and should not be relied upon as such. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. Sikich Financial does not provide tax or legal advice.