What are Donor Advised Funds?
Some time ago I touched briefly on the topic of Donor Advised Funds (DAFs). Recently I have had this conversation multiple times with clients and others. The conversations focus on whether it makes sense for their charitable giving and tax planning. I figured it was worth a bit more detail to explain why DAFs are going to become more common in the near future…in my humble opinion. As always, I am going to stay high level. Talk to your CPA or CFP® if you have specific questions.
First, a DAF is a “philanthropic vehicle” established so you can do charitable giving. Once you set up your DAF you can make your irrevocable charitable contribution to the fund and immediately receive the tax benefit. Growth of the fund occurs without taxes. Distributions to the charities of your choice happen over time based on your discretion.
There are two factors I believe will continue to increase the popularity of donor advised funds. The first is they used to be mostly under the purview of foundations, including community foundations. However, now you can set up a DAF through Vanguard, TDAmeritrade, Schwab, Fidelity and more. The cost is roughly an extra 0.50% for them to administer DAFs and the account minimums are pretty low.
Next, the standard deductions changed with the new tax laws. While many charities are fearful the doubling of these deductions will reduce the amount of donations they receive, with the right planning they actually may be able to see more stability with annual giving. Let me provide an example.
Say you donate annually $10,000. Half goes to your church and the other half goes to several other non-profits. You know your giving will continue every year going forward. At the same time, you have $50,000 of stock sitting in a taxable account. This stock has gone up in value quite a bit from when you acquired it. In talking to your CFP® or CPA (that’s where these conversations usually occur first), you discuss how to continue to achieve your charitable giving goals while also getting the most tax bang for your buck.
In the past, you have always given to these charities out of your income. You know, after taxes have come out of that income. Recently, you have been thinking about selling some of the appreciated stock and donating it, but realize you will pay capital gains of either 15% or 20%, depending on your tax bracket. Another choice is to donate all the stock at one time to the charities. But all that happens in one year.
Hopefully your CFP® or CPA is proficient enough with donor advised funds to recommend another solution. Simply, set up your own DAF, contribute the $50,000 of stock to it, get the immediate tax benefit for the full donation, and you can then distribute out $10,000 annually to those same charities over the next five years. There are other rules that apply and by using a DAF through either a large financial institution or a community foundation they will help keep you in compliance.
It takes a little foresight to plan out the use of a DAF, but as my brother (former Marine) used to say – “Proper planning prevents piss-poor performance.” Basically, if you consistently give to charities the use of a donor advised fund may be a tremendously beneficial planning tool for you. Heck, I know people who use it and have their kids and grandkids help decide where some of their gifting should go. Talk about passing along a charitable mindset.
So, while multi-millionaires are setting up their own private foundations, you can take advantage of a great resource out there to create your own personal charitable foundation. And at a fraction of the cost!