Charitable Giving: Using a Donor-Advised Fund

When it comes to charitable giving, some strategies are more beneficial (and complex) than others. In a follow up to Charitable Giving Basics I’ll explore how to elevate your charitable giving with a donor-advised fund. This strategy takes the tax savings up a notch with donor-advised funds. These have been around for several years. However, there are still many people who have not heard how these powerful vehicles can maximize their giving plans.

Get Clear About Your Purpose

The first step is to get clear about why you are giving, who you want to help, and what success looks like to you. This sentiment holds true even if your giving is modest and seemingly random at times. It becomes even more important as you start using advanced strategies and gift large sums intended to span years. Consider tax saving strategies as tools to lessen the blow of your tax bill, not as the main reason for giving. Generally, you cannot expect to receive back more in tax savings than the amount you give away.

What Is a Donor-Advised Fund?

With a solid plan for your giving in place, let’s explore one of my favorite strategies — a donor-advised fund (DAF). What is a DAF? Think about a private foundation, a nonprofit or charitable organization set up with donations from a single family. Examples of these include the $50 billion dollar Bill & Melinda Gates Foundation and the $14 billion dollar Ford Foundation. There are advantages for wealthy families to use private foundations when they want more nuanced control to their giving and intend on leaving a legacy organization. However, setting up your own private foundation has significant costs and administrative requirements. If you don’t have an extra billion sitting around to set up your foundation, consider a donor-advised fund (DAF). 

DAFs are private accounts created to manage and distribute charitable donations on behalf of an organization, family, or individual. The funds are usually established and managed by financial companies like Charles Schwab, Fidelity, and Vanguard, to name a few. You can think of a DAF like a clearinghouse for your giving. Instead of writing a check to multiple charities, you can write one to your DAF. The best part is you can claim the same tax deduction since the DAF is itself a charitable organization. Then, you can direct the DAF to send out money to one or multiple charities with the timing and amounts you choose. 

What Are the Benefits of a Donor-Advised Fund? 

For starters, it can simplify the logistics of making and tracking multiple gifts. You can write a check for $30,000 to your DAF and receive a deduction for the current tax year. Then, dole out all the $50, $100, or $ 10,000 gifts to fundraisers, church campaigns, and MPR member drive donations you want. No more tracking receipts for your tax return. Your giving history is available for you in colorful reports you can pull from your DAF’s website. This feature enables you to easily look up how much you sent IMBA to support your mountain bike trails four years ago, or whether you remembered to fund your favorite STEM organization to develop the next MedTech whiz kid.

Another benefit of the DAF “clearinghouse” aspect is the ease of administering charity beneficiaries for your estate. For instance, instead of adding multiple charities to your Will, Trust, or account beneficiary documents, you can simply name your donor-advised fund. By doing so, you can easily update the charities your donor-advised fund will give designated assets to when you die. These changes can be made any time without the costly rewriting of Trust documents. From an efficiency standpoint, your DAF is doing the work of receiving and managing the sale of designated assets which means your chosen charity will simply receive cash. This saves their time and money that can be used for the organization’s important work.

Finally, because DAFs are designed to accept ongoing or large one-time gifts, it is possible there will be a balance remaining after the donor has passed away. Similar to private foundations, the management of these vehicles can transfer to those you choose when you pass on. In this way, it is possible to build a legacy that your family can carry on for years as they continue directing assets to causes they care about.

How to Use Donor-Advised Funds

While logistics and gift tracking are nice, the real power is in your ability to time your giving. In Charitable Giving Basics I discussed the concept of bunching deductions into fewer tax years to maximize their value. Recall this is due to the standard deduction being high enough that many taxpayers do not benefit from itemizing deductions on their tax return.

With a DAF, you can make one large gift that might represent your giving for the next several years. Then, you can deduct it all in the first year along with other itemized deductions. In subsequent years you will utilize your standard deduction. Let’s say you consistently give $5,000 per year to help kids learn how to be entrepreneurs. You can instead make one gift of $25,000 to your DAF. Then schedule $5,000 to be sent out over five years to the organization from your DAF. The organization receives the same planned contributions, but you can use the $25,000 deduction in the first year of giving.

Now imagine you have an extraordinary income year due to your stock compensation from a large RSU vesting or stock option event, but future years are unlikely to be as large. This could be a great opportunity to give several years, maybe even the next decade or so of your planned giving in one year to offset current tax liability.

How to Contribute to a Donor-Advised Fund

You can write a check for donations to your DAF. However, an alternative move is to look for appreciated investment assets that you can donate instead. Let’s say you bought some Apple stock after they decided to add a little calling feature to their music player and the iPhone was born. The price of your shares is, shall we say, a tad higher today. As a result, you don’t want to sell them because your CPA told you how much it would cost in taxes.

That’s where DAFs can come in. You can select any number of shares of stock to transfer from your brokerage account. Your donation to your DAF will be for the current value of the stock and you will not need to report capital gains on your tax return. This strategy is far better than selling your stock, paying the taxes, then donating the cash. If you want to hold on to your stock longer, simply use cash you would have donated to re-buy shares. This way capital gains tax is avoided, but you still own the stock. Better yet, you will have a higher cost basis in the stock making future sales of your shares less costly.

What About Qualified Charitable Distributions?

So far, we’ve hit the big ideas about what a DAF is and how to use it. What if you want to give from your retirement account though? For those unfamiliar, giving to charities directly from an IRA is referred to as a Qualified Charitable Deduction (QCD). QCDs allow those over 70 ½ to avoid income taxes on your gifting and does not require itemizing your deductions. This means you can give from your IRA and still benefit from a full standard deduction. Better yet, if you are of required minimum distribution (RMD) age, you can directly offset RMDs with QCDs. 

What does this have to do with donor-advised funds? The idea is that generally you’ll want to give from your IRA first if you are over age 70.5. However, here are four reasons you may want to use DAF instead of or in addition to your IRA.

#1: High Deduction Years

In years where you have significant deductions to itemize. For instance, maybe you’ve had some significant medical expenses in the year. Even when you add those with your mortgage interest and real estate taxes you barely meet your standard deduction. If you make a gift from a DAF that year, you’d be able to take full advantage of the deduction. 

#2: Reducing Concentration Risk

You need to reduce your concentration risk in your portfolio. Let’s go back to the example of the giant pile of Apple Stock above. Apple makes up 20% of your portfolio and your advisor recommended pulling some of the risk off table. This could be a good opportunity to reduce the risk while offsetting some income from an IRA. Giving the stock to your donor-advised fund reduces the stock position in your portfolio and allows you to utilize it for giving.

#3: Gifting More Than Your RMD

If you want to give more to charity than the amount of your RMD, then utilizing a DAF could be beneficial. You can still make a gift to charity from your IRA over your RMD amount. However, maybe you’d like to preserve your IRA. In that case, you would utilize your IRA for QCDs up to the required minimum distribution amount. Once you fulfill your RMD, you then switch over to utilizing your DAF for giving.

#4: Gifting Above the IRA/QCD Guidelines

In some instances, your giving goal may be more than what is permitted from your IRA in a year. For 2024, the maximum QCD from an IRA is $105,000 for an individual. If your giving plans don’t allow for making gifts over multiple years from the IRA, utilizing strategies such as gifting low basis stock to a DAF can fill in the difference.

Conclusion

In summary, utilizing donor-advised funds can be very effective as part of your advanced charitable giving strategy. First, set an intention and plan for your giving strategy. Then consider the many strategies involving donor-advised funds from simplifying logistics and reducing concentrated positions to supplementing QCD giving from your IRA. If you would like to discuss using a donor-advised fund further or just need a second opinion about your current giving strategy – reach out to our team! We are here for you!

Resources:

• What is a Donor-Advised Fund? | Schwab Charitable

Need Ideas For Giving?

• Database and Score Card Tools
  • Charity Navigator
  • Give MN
• MedTech Company Foundations
  • Medtronic
  • Boston Scientific
  • GE Healthcare
• For Fun
  • Weird Charities – Go Fund Me