Feeling Charitable?

Giving feels good. And it can feel even better when it lowers your tax bill. But recent tax law changes made it harder to maximize deductions for charitable contributions. But what if you could regain that flexibility and also enjoy many more benefits?  Now you can with donor-advised funds.

Donor-advised funds (also called “DAFs”) have been around since 1931 but recently gained more popularity. According to the National Philanthropic Trust’s Donor Advised Fund report, donations to DAFs topped $34 billion in 2020, a 27% increase from the previous year. [i]

What’s behind this fast growth?

Maximizing Benefits

A donor-advised fund lets you donate when you want and maintain a significant amount of control. In addition, your funds stay invested until you direct them to be released. Until then, the investment grows tax-free, increasing the future good your donation can do.

The downside? Your gifts are irrevocable, so there’s no changing your mind once you fund the DAF. Your DAF, call it whatever you would like, so “The Surname Giving Fund” becomes part of a larger account that is maintained by the Custodian. Certain custodians allow your financial advisor to manage the underlying portfolio. Even though the establishment of the DAF is irrevocable,  you retain control over when and how funds are released for charities that you and your family select.

An Alternative to a Private Foundation

The donor-advised fund fills a hole in the market between just donating to a charity or establishing a private foundation. Private foundations have previously given individuals ultimate control over how their money was used. However, these benefits come at a higher cost since the overhead to establish and run such a foundation can be significant. A DAF gives you much of the same control at a fraction of the price, without the administrative headaches.

More Control over Your Tax Deductions

Donor-advised funds have been a boon for financial planning since you also get a great deal of control over this part of your tax liability. Contributions to a donor-advised fund are deductible in the tax year they are made.

Additionally, the deductibility of these donations is generous: you can donate up to 60% of your adjusted gross income in cash. If you’re donating appreciated assets, the limit is usually 30%. [ii] This can be very useful in tax planning. You can use contributions to offset significant gains or reduce taxable income under a targeted level.

Big Benefits for Highly Appreciated Assets

DAFs can work wonders when you’re concerned about a big tax bill for highly appreciated assets. Let’s say you have concentrated stock that has gone up significantly since you acquired it. You can donate it via your DAF. You get the write-off for the donation at the current value and do not have to pay capital gains on the increase. This does not work for Short Term Gains, so ensure when you gift it is long-term gains (assets held for a year and one day).

Making Estate Planning Easier and Passing Down Charitable Values

Donor-advised funds are also fantastic simplifiers for estate planning. When you contribute to DAFs, gifts are irrevocable, so they are no longer subject to estate taxes.

One final benefit of donor-advised funds is the ability to involve your children and grandchildren. You can make it a family effort and engage children early in selecting charities and directing individual grants. Then, you can name successor advisors to take over the task after you’re gone. Because the account remains invested throughout, your legacy can continue to grow…helping your family embrace the benefits of making a difference in the world.

[i] https://www.nptrust.org/reports/daf-report/

[ii] https://www.fidelitycharitable.org/articles/what-the-cares-act-means-for-charitable-giving.html

Disclosure: Emerald Advisors, LLC is a registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.