Donor Advised Funds, also known as DAFs, are a simple but powerful tool that can enhance the charitable giving and strategic planning that you already do (or want to start doing!).
A Donor Advised Fund provides similar benefits to a family foundation, but in a simpler, turnkey format that offers access to a broader range of people. The primary element to understand is that donors can make a donation to their DAF and receive a charitable deduction, but don’t have to grant those funds out to charitable organizations immediately. This means contributed funds can be invested to increase the size of future charitable giving or granted to organizations as the owner chooses. When a client contributes to their DAF, this is called a donation. When the client gifts money from their DAF to a charity, this is called a grant. With this tool, clients are empowered to be more in control and organized with their giving efforts now and as part of their legacy.
The Benefits of Donor Advised Funds
Donor advised funds are growing in popularity as they offer additional tax planning opportunities. In 2017, changes to tax law placed a $10,000 limit on state and local tax deductions, including property taxes, and simultaneously increased the standard deduction. As a result, more individuals are taking the standard deduction, and therefore don’t receive an itemized deduction for charitable contributions. This created a new opportunity for DAFs to shine. Using a DAF, a strategy has emerged for clients to fund multiple years of charitable gifting to their fund, and in that year they itemize rather than take the standard deduction and get a larger tax benefit. Although the lump sum was donated in a single year for tax purposes, the actual grants to non-profit organizations can still be spread out over time.
When you contribute cash to a DAF, the tax benefit comes in the form of a deduction on your annual tax return. If a client is able to donate highly appreciated stock, the benefit is even greater. When donating stock, the donor avoids paying capital gains tax owed on the sale in addition to receiving a deduction on their tax return. This double tax benefit can allow for larger gifts by allocating more money to charity and less to taxes.
Potential for Growth
Once money has been contributed to the DAF, funds are available to be granted out at the client’s discretion. When clients do not want to grant funds immediately, the money can be invested for future growth. We work with our clients to select the proper asset allocation to achieve their giving goals. Some donors may prioritize future giving and opt for an equity-focused portfolio, while other donors may prioritize stability with a more bond focused allocation. Similar to a client’s core investment portfolio, we will review this allocation periodically and update it appropriately as charitable needs and giving goals change over time.
Organization & Simplification
One additional benefit of a DAF is that you don’t have to keep track of every gift acknowledgment from every charity you support, which can be a headache at tax time each year. With a DAF, you only need the receipt from your initial donor-advised fund contribution. When you’re ready to grant out money to charitable organizations, you can simply log in to your account and make grants to any 501(c)(3) organization. In addition to making one time grants, clients can also setup up reoccurring grants to any of their favorite causes or organizations.
Restrictions with Donor Advised Funds
When a client makes a contribution to their DAF, it is considered an irrevocable gift to charity. Although the client maintains direct that money to charities of their choosing, the assets no longer belong to the client. This means that these funds are not available to you if an emergency or opportunity arose in the future. For this reason, we do not suggest overfunding a DAF or contributing money that you are not willing to irrevocably give away.
Leaving a Charitable Legacy
Because the gift is irrevocable, there is a specific process when the donor passes away, and is handled separately from any trust or will that is in place. The first, and most common option is to complete an instruction form that details which charities should receive the remaining account balance at death. The second option is to name a successor owner for the DAF account. Often this may be children of the original donor, and they would step into the role of allocating any remaining funds and carrying on the charitable legacy of their parent or friend.
The DAF, both during life and after, can be a powerful way to engage the next generation in charitable giving as a core value. Clients have used their DAF to create a teaching moment that reiterates wealth accumulation is not only about personal and family well-being, but also contributing to and changing the world that we live in.
About Daniel Smyth, CFP®
Daniel Smyth works as a Lead Advisor with North Berkeley clients to develop financial plans and implement investment strategies.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.