The Advantages of Donor Advised Funds

People donate to charity for a variety of reasons. From a sense of self-fulfillment to a spiritual calling, empathy, a desire to build or enhance a reputation, a pursuit of tax savings, connection to a cause and other factors and concerns help drive giving. Charity is driven by a mix of psychological reward, moral conviction, and financial strategy.

However, in most instances, the default gift is a check from one’s bank account. For affluent households, the frequency and amount of those checks can be sizeable. Many of these households may not be aware of a financial tool that can help make the giving process smoother in many ways: the donor advised fund (DAF.)

The advantages of donor advised funds

What is a Donor Advised Fund?

A DAF is a charitable investment account in which the assets that go into it can never leave unless they are used for charitable purposes. The fund is administered by a public charity ( a sponsor) whose purpose is to oversee the account. The DAF holder ( the donor) transfers assets into the account and makes grants out of it to support their charitable giving.

For those with a high net worth and a propensity for giving, a DAF provides a variety of advantages for better philanthropy. This article will cover those benefits.

Tax Advantages

Donating assets into a donor advised fund allows:

• Immediate Tax Deduction: You can receive a tax deduction for the dollar amount of the gift into the fund in the year of the contribution even if you don’t donate out grants to charities in the same year.

• Avoid Capital Gains Tax through Appreciated Assets: Appreciated assets such as closely held shares, mutual funds and other non-cash assets ( real estate, mineral rights, precious metals) can be donated into the DAF at its full fair market value while avoiding capital gains tax.

• Bundling Charitable Contributions: Also referred to as “bunching” or “stacking”, this allows multiple years of tax deductions to be implemented in one year. This exceeds the standardized deduction and allows an itemization of deductions, thereby increasing tax savings.

Investment Growth

The charitable assets within the fund can continue to grow tax-free over time, providing additional asset value and more money that can be donated to the causes important to the donor. As with any investment account, it is possible for the DAF value to decrease. However, that decrease will never have a negative tax impact on the DAF holder. The tax deduction benefit was based on the asset value at the time that the contribution was made into the donor advised fund.

Many DAF sponsors offer a variety of investment options, allowing the fund assets to grow at a rate that exceeds the return if those dollars were sitting in a bank account. Some DAF sponsors even allow the financial advisor of the donor to manage those charitable assets within the account. This allows the donor to benefit from a consistent investment strategy that is no different from their non-charitable investment holdings.

Flexibility, Control & Simplicity 

A DAF provides:

• Separating the “Gift” from the “Grant”: A DAF allows a donor to make a gift into the fund ( a contribution) and earn the immediate tax benefits. However, the donor has the flexibility to take time before they make a “grant” to a cause that is important to them. In most DAFs, there is no time constraint that requires them to make a grant in a specific timeframe.

• Simplified Record Keeping: Unlike the practice of keeping gift receipts every time donation is made to a charity, the donor only needs to have the receipt from the DAF sponsor for their contribution into the fund.

• Simplified Giving to Multiple Charities: The donor can make grants to multiple charities, with the DAF sponsor handling all the administrative efforts of grant making.

• Legacy Planning: A donor can create a long-term strategy, allowing successors to take over the DAF when the original donor passes away and continue a tradition of giving.

• Anonymity: For those donors who desire privacy or anonymity, granting through a donor advised fund allows them to maintain that privacy. The grant payment from the DAF to the charity can identify nothing more than the name of the DAF sponsor, leaving the identity of the original donor private.

 Conclusion

More and more donors each year discover the benefit of donor advised funds. Over the last 10 years, it estimated the amount of assets within DAF accounts have grown from nearly $60 billion to over $250 billion.

For donors(and their trusted advisors) who may not be aware of DAF benefits, Generosity Nexus can play a pivotal role. We not only help a donor and their family better understand and strategize their charitable interests but formulate a plan on what sort of giving tools may serve them best.

Don’t hesitate to schedule an appointment to learn more about how we can help you.