Give to Charity Using a Donor Advised Fund: Your Guide to Strategic Giving

Donor Advised Funds (DAFs) are changing the landscape of philanthropic giving. Think of them as charitable investment accounts. You contribute cash, stocks, or even more complex assets to a DAF and receive an immediate tax deduction. These funds can then grow tax-free, and you have the flexibility to recommend grants to your favorite charities over time.

DAFs differ from donating directly to a charity because the sponsoring organization (community foundation, financial institution, etc.) technically takes ownership of your donation. You retain the privilege of advising how those funds are distributed to charities of your choice. It’s a win-win: you maximize your charitable impact while simplifying the giving process.

Note: DAFs are often compared to private foundations, but they are much easier to establish and administer, with lower costs involved.

Benefits of Using a Donor Advised Fund

Let’s delve into why DAFs are so popular:

• Immediate Tax Deductions: You receive the tax deduction in the year you contribute, even if you decide to distribute grant money later.
• Tax-Free Growth Potential: Your contributions can be invested, allowing your charitable dollars to grow over time.
• Flexible Timing: No rush! You can take your time deciding which charities to support. This allows for strategic grant-making.
• Anonymity Option: Your grants can be made anonymously if you prefer.
• Streamlined Giving: DAFs eliminate the hassle of managing multiple donations and make record-keeping a breeze.

How to Set Up a Donor Advised Fund

Setting up a DAF is surprisingly simple. Here’s what you need to know:

1. Choose a Sponsoring Organization: Many reputable organizations sponsor DAFs. We recommend Schwab Charitable.
2. Open Your Account: The process is similar to opening a bank account – you’ll complete paperwork and name your fund.
3. Make Your Contribution: Minimum initial contributions vary, but some sponsors make it accessible with low starting amounts.
4. Start Giving (The Fun Part): Explore charities and recommend grants whenever you’re ready!

Fees: While DAFs have numerous benefits, be aware that sponsors charge administrative fees. These fees vary, so it’s important to compare them when choosing where to open your account.

What Can You Donate to a Donor Advised Fund?

DAFs offer immense flexibility in the types of assets you can donate:

• Cash: The most straightforward option.
• Appreciated Securities: Donating stocks or mutual funds that have gained value is a tax-savvy strategy. You avoid capital gains taxes and still get a deduction for the full, fair-market value of the asset.
• Complex Assets: Think real estate, private business interests, or even cryptocurrency. DAFs can manage these, often providing greater tax benefits than selling directly and then donating the proceeds.

Investment Options within a DAF

One of the powerful aspects of a DAF is that your donated funds don’t just sit idle. The sponsoring organization typically offers investment choices, allowing your charitable dollars to grow even more over time.

Common investment options include:

• Mutual Funds: Diversify your holdings across a range of stocks, bonds, or other securities.
• Index Funds: Track specific market indexes passively.
• Socially Responsible Investing (SRI): Align your investments with your values.
• Individual Stocks: Some sponsors allow you to invest in individual stocks.

Key Point: Choose investments that match your charitable timeline and risk tolerance. If you plan to distribute grants soon, you might stick with conservative options. For long-term growth, a more diverse portfolio might be a good fit.

How to Recommend Grants from Your DAF

Recommending charities to receive grants is the heart and soul of a DAF! The process is user-friendly:

• Research: Explore charities that align with your giving interests. Resources like Charity Navigator (https://www.charitynavigator.org/) or Guidestar (https://www.guidestar.org/) aid in finding reputable organizations.
• Recommend to Your Sponsor: Most DAFs have online portals or simple forms to submit your grant recommendations.
• Restrictions: Ensure the charity is a qualified 501(c)(3) public charity. Typically, you cannot grant funds to individuals or political campaigns.
• Disbursement: The DAF sponsor handles the due diligence and processes the grant payment to the charity.

Using a Donor Advised Fund Strategically

Let’s go beyond the basics and understand how to make the most of your DAF:

• Bunching Donations: Consolidate multiple years of charitable giving into a single tax year to maximize your deductions, especially if you anticipate exceeding the standard deduction.
• Legacy Planning: DAFs are excellent tools for establishing a lasting philanthropic legacy or creating a family foundation alternative.
• Major Gift Timing: DAFs are useful if you’re planning a significant gift, for example, upon the sale of a business or during retirement.

Additional Things to Consider

Before setting up a DAF, let’s explore some essential points:

• Finding the Right Sponsor: Do your homework! Compare sponsoring organizations based on:
  • Fees: Administrative fees and fund management expenses can vary.
  • Investment Options: Ensure their offerings suit your goals
  • Minimums: Check the minimum contribution requirements.
  • Values Alignment: Especially important if you’re passionate about specific causes.
• Your Giving Style: Are you a hands-on giver who wants to meticulously research charities? Or, do you prefer a streamlined process? DAFs offer flexibility to fit different styles.
• Alternatives: If a DAF doesn’t feel like the perfect fit, explore other planned giving options like charitable trusts or donating directly to a permanent endowment at your favorite charity.

Call to Action

If increased tax benefits, greater giving flexibility, and the opportunity to maximize your charitable impact sound appealing, consider whether a Donor Advised Fund is the right choice for you. Many resources are available to help you on this philanthropic journey.

If you want help maximizing the tax benefit of your charitable donations, click here and schedule a phone call with our team to discuss your particular situation.