The way many wealthy give is to take their money and set up a foundation, transfer money into it, have it grow, and then give money away over time. You're probably familiar with the wealthiest charitable foundation in the United States, the Bill & Melinda Gates Foundation. Setting up and maintaining a private foundation comes with administrative expenses so it's not for everyone.
Maximize your charitable giving with a donor-advised fund
Increasingly, Americans are moving from supporting their favorite charitable causes with ‘checkbook giving’ to the ease, convenience, and effectiveness of donor-advised funds (DAF.) Donor-advised funds are also one of the fastest growing charitable vehicles with contributions now representing 7.6% of total individual giving in the US.1
A donor-advised fund is a charitable giving program that allows even small-scale givers to put money into an account, let it mature, and then disburse it gradually. This combines the most favorable tax benefits with the flexibility to support your favorite charitable causes at virtually any time. To establish a DAF, you make an irrevocable charitable contribution to the public charity that sponsors the program; that contribution is then invested and may grow tax free; and you are able to recommend grants to eligible 501(c)(3) public charities at any time. Donor-advised funds also let you specify whether you’d like the grant to be made anonymously or be acknowledge for the support.
When you deposit money into a donor-advised fund, you are making an irrevocable charitable donation to the donor-advised fund so it leaves your estate. If you have a big earning year, you can use the DAF to time your deduction, depositing money in the DAF in years when your earnings permit you to receive a greater tax benefit, and then grant the money to qualified charities over a period of years. In other words, you get the tax break in the year the money goes into the fund, not when it’s distributed to charity.
Grow your giving
Contributions made to a public charity with a DAF program can be invested with the potential to grow, tax-free – ultimately resulting in additional dollars for charitable grants. A DAF program can offer a variety of investment options to help you meet specific investment goals for your charitable assets. If you place enough money in the account (at Fidelity Charitable and Schwab Charitable, for instance, it's $250,000), you can choose to have an investment advisor manage the investments.
Additionally, a DAF can be funded with certain assets beyond cash equivalents or publicly-traded appreciated securities.These assets can often be highly appreciated and donating them to charity can potentially eliminate large capital gains exposure, allowing the charity to ultimately receive more support.
With a donor-advised fund you can:
- Make a tax-deductible donation. Donate cash, stocks, real estate or non-publicly traded assets to your DAF and get your tax receipt.
- Support charities you love, now or over time. You can support any IRS-qualified public charity with the money you’ve put into your donor-advised fund.
- Grow your donation, tax-free. While you’re deciding which charities to support, your donation will be invested so it has the potential to grow tax-free and generate even more money for the causes you care about.2
- Support any charity. You can use your DAF to support all the same charities you do today, whether it’s your alma mater or a friend running a marathon for a good cause.
- Get one tax receipt. As soon as you donate to your DAF, you’ll be eligible for a tax deduction—just like any other charitable donation you make. And no matter how many charities you support throughout the year, you’ll only have one tax receipt to keep track of—the one you get from us.
- Donate cash, stocks and more. Unlike many smaller charities, many DAFs can accept a wide range of financial assets, from cash and checks to stocks, bonds and even non-publicly traded assets like real estate.
If you'd like to learn more about donor-advised funds to see if it makes sense for your long-term charitable giving needs, contact us for more information. One of our advisors would be happy to chat with you.
Photo by Katt Yukawa on Unsplash
What charities and causes that are important to you? Are you seeking a more structured way to make donations and involve your children in the process?
- 2015 Donor Advised Fund Report, National Philanthropic Trust
- Donations are invested and investing involves risk. The value of an invested donation will fluctuate over time and may gain or lose money.
Phew! It was really enlightening to discover from your article that our donor-advised fund can be channeled into any non-profit organization we personally like. My son is turning 20 next month and he plans to do something thoughtful for the local community to celebrate it. I’ll show him this tip so he can donate to the right place soon after.
I’m glad that you found the article helpful. Donor advised funds are great for tax planning or moving charitable giving money out of your estate. Further, it’s a tool for families to manage their charitable giving, including providing families something to rally around when having meaningful conversations around giving.