December 15, 2021
Donor-Advised Funds are an excellent way to carry out your charitable giving goals.
Why are they so beneficial?
It’s primarily because of the unique advantages like immediate tax benefits and flexibility concerning cash and non-cash assets.
Let’s explore donor-advised funds a little more in-depth to see how they may be a valuable tool for you.
The Basics of Donor Advised Funds (DAFs)
A Donor-advised fund is a private fund for philanthropy. You can set up a DAF for your own giving, but a DAF can also accept aggregate contributions from multiple donors. This feature provides a way to democratize philanthropy by accepting contribution bases as low as $5,000. A donor-advised fund is usually created or sponsored by a specific charity.
The single most prominent advantage of a DAF is the ability to deduct contributions, the same way you can deduct donations directly to a charitable organization. They offer you the ability to deduct up to 50% of your adjusted gross income. A key difference here is that the donor-advised fund is an investment account and can hold the funds indefinitely.
Another big perk is DAFs accept non-cash assets such as stock, bonds, and mutual funds as contributions. This could make a big difference for both you and the charity you donate to if you have significant unrealized capital gains in assets that you wish to use to fund your donation. By placing the assets directly into the DAF, you can avoid selling them, which keeps you from realizing and paying taxes on the gains.
Doing so actively lowers your tax bill, the charity receives a larger donation, and the investments can simply continue to grow, earn interest, or pay dividends—all of which provide more money for the charity.
DAFs provide an extra layer of flexibility over direct donations too. Those who are unsure of exactly which charity they wish to contribute to can make a contribution to a DAF today, let it grow, then decide which charity (or multiple charities!) will receive a distribution from the DAF later.
Maximize the Power of Your DAF
Apart from being an excellent vehicle for charitable giving, a DAF is a useful tool for your own tax planning, assuming you are already charitably inclined. But simply taking a deduction for a contribution isn’t really tax planning.
Here’s how to think more strategically about your donation and deductions.
Suppose you have a higher income than average this year. You can make a sizable donation to a DAF for the tax break this year, then disperse the funds to the charitable beneficiaries whenever you please. That’s a strategy you can’t accomplish without the DAF.
A similar strategy may help you take advantage of itemizing deductions even if you don’t normally partake. Because of the recent increase in the standard deduction, itemizing your charitable giving isn’t as effective as it used to be.
Why?
It doesn’t make sense to itemize deductions if they don’t exceed your standard deduction. For reference, the standard deduction for 2021 is $12,950 for those filing single and $25,100 for married couples filing jointly.
Bundle Your Contributions
Oftentimes, you don’t get a tax break for charitable donations unless your itemized deductions exceed the standard deduction.
But here’s a potential workaround: Bundle up multiple years’ worth of typical annual donations and contribute one lump sum to a DAF in a single year. Doing so could get you over the standard deduction and allow you to deduct more than usual.
For example, say you generally donate $10,000 per year. Instead, you could donate $30,000 every three years. Bunching your donations would allow you to clear that standard deduction hurdle at least every few years.
Donor-advised funds also provide several perks that aren’t tax-related as well. These include:
- The ability to make anonymous donations and maintain your privacy.
- You can create an “In memoriam” fund to commemorate a lost person.
- Since DAFs are irrevocable, you can bring children in to help you manage the fund and decide which charities will receive distributions. This lets you teach your family’s next generation about charitable giving and provides a legacy family gifting vehicle to continue the tradition when you pass.
Make Sure a Donor Advised Fund is Right For You
Donor-advised funds are great philanthropic and tax planning tools, but that doesn’t mean they are necessarily the best tool for you. There are some things to consider before you decide if a DAF is right for you.
For starters, although you can give your input and wishes toward what your money goes toward, the money leaves your hands and control when you contribute to a DAF. Since you are getting immediate tax breaks, contributions are irrevocable as you contribute to the DAF, not when disbursements are made to charity. So, if you want complete control of every dollar, a DAF might not be for you. However, if you tend to delay deciding who to donate to, then remember that the DAF allows you to get your tax break now.
Like all investment accounts, there are fees and minimum requirements on most DAFs. Often, the benefits outweigh the cost but make sure they do to you before giving to a DAF.
Need help with your year-end giving or DAFs? Blue Rock can help. We will be happy to help you decide if a DAF makes the most sense for your charitable giving.