Donor-Advised Funds
Donor-Advised Funds (DAFs) are one of my favorite charitable tools because of their convenience and tax benefits. From a very practical standpoint, a DAF serves as an account for your charitable dollars, which you distribute on your own schedule to the non-profits you care about. Most DAFs are set up to feel almost like using online bill pay to support your causes. The convenience alone makes them very compelling. When you add the tax benefits and flexibility of DAFs, they become a handy financial tool, indeed.
Having a Donor-Advised Fund is not unlike running your own personal foundation. The key here is that a foundation actually manages your DAF, and you advise what happens with the funds. That arm’s length relationship to the money means that you gave the money away when you put it in the DAF. You don’t control it. You advise the foundation on how to use the money. The foundation is responsible for understanding how the funds are used. For example, the foundation will deny requests to give money to your alma mater through your DAF to get basketball tickets. But under most normal circumstances, the foundation will follow the donor’s guidance.
Schwab Charitable, Fidelity Charitable, and community foundations like the Foundation for the Carolinas here in Charlotte are all places where you can set up a DAF. Do you plan to itemize your 2021 returns? Are you looking for deductions before year-end? Perhaps you’d like to help the community. Regardless of your motivations, transferring money into a DAF now counts as a charitable gift for 2021.
One of the most advantageous ways to fund your DAF is by transferring appreciated stock. By doing so, you avoid the capital gains tax on the stock AND get a charitable deduction.
Once you have funds in a DAF, you can distribute the proceeds to your favorite charities all at once or overtime. If you don’t know where to donate all the money today, you can leave a balance in your DAF and invest those dollars for growth— again, not unlike a private foundation.
Donor-Advised Funds make for a valuable tool to any investor with charitable intentions. Here’s a case study where they really make sense:
Linda finds herself with a concentrated position in Apple stock purchased ten years ago at a very low-cost basis. She wants to sell $50,000 of her stock to rebalance into other investments. If she were to sell the stock outright, she would be responsible for a hefty capital gains tax come April.
Linda also feels it is important to give back to her community. In addition to her church, she regularly supports her college, the local food bank, and the symphony. She usually writes checks to each charity annually.
Her financial planner recommends selling half of her stock. She wants to diversify and open a donor-advised fund with the rest.
She transfers $25,000 worth of Apple stock to her new DAF. This is a tax-deductible gift of $25,000, and by doing this, she avoids the capital gains tax she would have owed from the sale of those shares.
Once the gift is completed, Linda goes online to her DAF and is able to find each of her charities in their online directory. She quickly and easily recommends the following grants:
$10,000 to her church
$5,000 to her college
$2,500 to the food bank
$2,500 to the symphony
This leaves her with $5,000 in her DAF, which she invests in a balanced portfolio, so the funds will continue to grow until she decides to make future gifts. If Linda had sold her stock first and then made her charitable contributions in cash, that $5,000 or more may have gone towards paying taxes to the government.
She really begins to enjoy her DAF as the coming year unfolds. Her neighbor is raising money for the Leukemia and Lymphoma Society. She can easily support his marathon with a gift from her DAF. Her local public radio station has a fund drive soon after that, and again, she turns to her DAF. Her sister’s cat dies, and she can make a memorial gift to the Humane Society using her DAF.
As you can see, for the charitably minded investor, a donor-advised fund is a beneficial resource. Want to learn more? Let’s have a conversation.
