Client Question: Tell me more about donor advised funds

June 30, 2022

There is a wonderful philanthropic underpinning to America. The Annual Report on Philanthropy for the Year 2021 reports that individuals, bequests, foundations and corporations gave an estimated $484.85 billion to U.S. charities in 2021.

An increasingly popular vehicle for charitable giving is a Donor Advised Fund and it is an idea we often bring to clients. Recently, a client asked me to remind them about this concept I’d shared over the years, as they were now ready to fund and utilize it. I thought it may be of interest to others, so here is some basic information on donor advised funds

What is a Donor Advised Fund?

A Donor Advised Fund (or DAF for short) is a giving account that allows donors (ie: the DAF account holder) to make charitable gifts over time. A tax deduction is received upon funding of the DAF and then grants can be made to charitable organizations using those funds over years (or decades) to come.

A sponsoring organization manages the account (for our clients, we work with Schwab Charitable) and the donor can either retain responsibility for the subsequent gifting and/or look to the sponsoring organization for assistance.

What are the benefits?

Above all, the DAF facilitates charitable giving. However, you can do that via other methods (ie: gifting of current cash), so it’s important to understand the benefits of this particular structure.

The main benefit of DAF is the ability to make a larger donation in a given tax year and then allocate those funds to specific charities over future year(s). This can be helpful if you have a higher than usual earning year or an outsized investment gain, or if you are attempting to “double up” on charitable giving in a year to allow for itemized deductions (instead of taking the standard deduction).

DAFs also provide an easy way to avoid long-term capital gains tax. DAFs can be funded with appreciated stock/investments that you have held for over a year. If you contribute these appreciated securities directly to the DAF, you receive a tax deduction for the full fair market value of the investments and no capital gain tax is owed on the appreciation. You can then grant the resulting proceeds (securities will be sold once in DAF) to charities over time.

DAFs also allow for anonymity, as you will have the ability to make grants without identifying yourself if you so choose.

DAFs can also be used as a family gifting vehicle, as you will have a pool of funds you can work with your spouse and children to allocate over time.

DAFs also serve as an estate planning tool as any funds placed into the account are not deemed part of an estate and are therefore excluded from any estate taxes upon your death.

How can I open one?

Almost all major broker/dealers offer a Donor Advised Fund product (ie: Schwab, Vanguard, etc). As with any investment-type decision, carefully evaluate your needs and the account structure and fees at the various organizations. If you are a Windermere client, we are happy to assist with this.

How do I fund the account?

DAFs can be funded with cash or with appreciated securities (note: look for ones held over a year). As noted above, there are tax considerations in connection with these accounts and their funding – so please be sure to consult with your financial advisor and tax advisor in connection with any such transaction

Charitable gifting is a critical element of American society and perhaps a Donor Advised Fund can help you and your family find your own ways to support others. Happy gifting!

Leave a note

Leave a Reply

Your email address will not be published.

SUBMIT FORM

Not sure what step to take next?  No problem -send us a message using this form and we'll be in touch soon to figure it out - together

Reach out

Hope to hear from or see you soon. In the meantime, travel on!

FOLLOW ON INSTAGRAM

Your message has been sent. We'll be in touch shortly.

Thank you.

Follow us on Instagram

@windermerewealth