Donor-advised funds (DAF) offer a simple, flexible and tax-efficient way to give to your favorite charities. A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. They allow for individuals to donate cash, stocks or non-publicly traded assets such as private business interests, cryptocurrency and private company stock to be eligible for an immediate tax deduction.
There are several different types of donor-advised fund sponsors to choose from. First, there are approximately 700 community foundations that sponsor donor-advised funds, as well as hundreds of faith-based entities. Community foundations typically appeal to donors interested in giving to local causes. They employ staff that are more knowledgeable about local charity initiatives.
There are also approximately 30 national donor-advised fund organizations in existence. The majority of these organizations are actually charitable arms of for-profit financial services institutions, such as the Vanguard Charitable Endowment Program, the Schwab Charitable Fund, and the Fidelity Charitable Gift Fund.
Lastly, Public foundations typically support national and international charities that focus on a particular issue or geographic region. For this reason, public foundations personnel often have specific expertise to help donor-advised fund holders find causes that matter to them.
The major benefit of donor-advised funds is the ability to take an immediate tax deduction on the amount contributed. Donors contributing cash can take a deduction of up to 60% of adjusted gross income while donors contributing securities or other assets can take a deduction of up to 30% of adjusted gross income. The in-kind tax deduction can be especially valuable for highly appreciated assets because it allows investors to remove these assets from their taxable portfolios without taking the tax hit associated with the embedded capital gain.
Additionally, contributors to a donor-advised fund will retain full control over when and where to make charitable donations. Account holders can make donations all at once or over time, and to a single charity or a variety of charitable organizations. Donors also retain control over how the remaining assets are invested. Investors can typically choose from several preset investment options with different risk levels, ranging from conservative, bond-heavy portfolios to more-aggressive, equity-oriented portfolios.
Despite their advantages, donor-advised funds aren’t the right choice for everyone. Depending on the custodian, some may require a large initial contribution. Donor-advised funds also come with an additional layer of annual administrative costs. They often charge a percent of the account value in addition to the other underlying expenses (operating expenses for mutual funds and exchange-traded funds, or trading commissions for individual stocks and bonds).
In the end, it’s important to determine what’s going to be the most efficient manner in transferring your assets and taking the tax deduction. It’s important to consult with your CPA or financial professional as everyone’s situation is different.
Ben Webster, CFP® and Derek Prusa, CFA, CFP®
Co-Founders and Owners of Aspire Wealth
August 2021 Newsletter
