Donor-Advised Funds
Charitable giving is often an important element of investors’ financial plans. When done strategically, philanthropy can benefit not only the recipient organizations, but also the donor, helping to alleviate some of the inefficiencies of long-term tax and estate planning. One of the most flexible options for charitable giving is a Donor-Advised Fund (DAF). DAFs are accounts to which donors can make an irrevocable gift of assets, while retaining control of the investments, then using the funds to support nonprofit organizations whose mission and work they admire.
Benefits of Donor-Advised Funds:
DAFs are easy to set up and administer.
There are typically no start-up costs, no IRS-required minimum distributions (though some DAF custodians may require a minimum gifting schedule), and efficient tax recordkeeping.
DAFs can accept a multitude of different assets, from cash, mutual funds, and highly-appreciated concentrated stock, to, in some cases, real estate, closely held business assets, and collectibles.
Most DAF administrators offer streamlined management, making it easier to find and research charities, make donations, process grants, choose investment options, etc. Some might offer more customized philanthropic advice at certain giving levels, helping bring a more conscientious approach to clients’ giving strategies.
Grants to your favorite nonprofit organizations can be made as one-time grants or set up as systematic, ongoing payments.
DAFs offer a high level of privacy, allowing grants to be made anonymously when you’d like to avoid direct solicitations from grantee organizations.
Investments within a DAF may grow tax-free, maximizing your long-term giving potential.
Grantors retain control of how the DAF is invested, either through a curated list of investment options, or, in some cases, through an open architecture investment account. It’s important to note that, just like any investment, assets invested in a DAF are subject to market fluctuation and may decrease in value. While any decreases will not affect your tax deduction, it’s important to choose an appropriate investment strategy within the DAF that meets your charitable goals and timeline.
Contributions to a DAF do not have to be granted to charities immediately, allowing clients the flexibility to make contributions, taking the current year tax deduction when it best suits their financial situation, and then distribute the funds over time.
DAFs provide an opportunity to create a family philanthropic identity and legacy plan.
Steps can be taken to ensure the longevity of your giving strategy after your death by naming successors to take over the management of your fund, establishing charitable beneficiaries, or making endowment arrangements with specific ongoing systematic grants (potentially subject to certain minimums).
Some potentially useful DAF strategies:
Incorporate DAF contributions into your regular portfolio rebalancing: When rebalancing a taxable portfolio, consider doing so by first peeling off shares of highly appreciated long-term securities for contribution to your DAF, rather than selling them in a rebalance.
Donate blocks of concentrated positions: If you have, for instance, a large holding in a single stock with a low, long-term cost basis, you could reduce both your concentration risk and latent tax liability by contributing the shares to a DAF.
Front-load contributions in high-earning years: If you are expecting a spike in income in any year, perhaps from a large bonus or the sale of a business or appreciated asset, consider making a larger contribution to your DAF to increase your current year tax deduction. Because of their inherent flexibility, the contribution can simply be invested for tax-free growth and then granted out to community organizations later.
A Donor-Advised Fund can be a valuable tool in your charitable giving toolshed, but as with any financial strategy, be sure to consult your Advisor to determine whether it is an appropriate solution for you.