Gratitude and giving are filling a need in American lives as we look for ways to improve our quality of life, our communities and the world at large. Giving encompasses both time and money. It’s a way of sharing what we have to make someone else’s life better. And studies show there’s no better way of finding happiness than in giving to others.
Most of us have been giving as we can over our lifetimes. But as we build our own financial security, many people are looking for how to take giving to the next level. Instead of writing checks at the kitchen table, we want to consolidate our giving and use technology to simplify and amplify how we use our resources.
Enter the donor advised fund (DAF). They are easy to set up, have minimal costs, centralize charitable giving, and simplify tax records. And they are exploding in popularity.
How Do They Work?
You open an account (a lot like setting up a mutual fund account), fund it with at least the minimum dollar amount, choose how you want to invest the money and start making grants. Add more money when you choose to. Set up one-time gifts or recurring gifts. Grants must be to qualified charities. No friends or relatives or other people you want to help out. Keep the checkbook for those kinds of gifts.
When you make a contribution to your Donor Advised Fund, you get an immediate tax deduction. With the new tax law, it can make sense to give larger contributions in years with higher taxable income. This is one of the few ways you can increase deductions over the standard tax deduction and be able to itemize.
Giving money away to qualified charities is easy. You typically go to the DAF website, choose Make a Grant and type in the organization you want to give money to. Up pops your charity, you put in what you want to give, you can specify any instructions (like for a particular purpose or “in honor of” or “in memory of”), and when you want the gift to go to the charity. And you’re done.
Simplicity and Ease
The super wealthy used to set up private foundations (and of course many still do). But more often now, they will use a DAF or a combination of both types of charitable vehicles.
There are no legal fees to set up a DAF. The annual administrative fees are minimal. It’s a do-it-yourself type of arrangement. If you need help, I’ve found the people manning the help lines are friendly and courteous. Think about it—what a great job helping people help other people!
When you set up the account, you can contribute either cash or securities. Many people find it advantageous to contribute appreciated stock. You don’t pay capital gains tax to liquidate it. Neither does the DAF because it’s a charitable organization. It’s great for using highly concentrated positions of stock. You end up more diversified and you get a tax break doing it.
Speaking of tax breaks, let’s go over how that works again. When you put money in, you get an immediate tax break. If you start with $25,000 in cash, you get a $25,000 tax deduction. That’s going to be higher than the standard deduction. You can give away all of that right away or give away smaller amounts over time. So you could give $5,000 away for five years. You don’t get a tax deduction when the money goes to the charity because you got your tax break upfront.
Now if you really want to make a HUGE donation, you need to remember that you can only deduct up to 30% (for capital gains securities) or 60% (for cash) of your adjusted gross income on your tax return. Anything above that carries forward for the next five years. So you may want to talk to your financial advisor or CPA to figure out a maximum deduction in any particular year. These rules can be complex, so it’s best to get some advice on larger gifts. And of course there are compelling reasons to give to others regardless of a tax deduction.
While the money is in the DAF, you can invest it. Any growth is tax-free. If you know you want to give it away soon, you may choose to put it in a money market within the DAF. Otherwise, you can choose from a variety of investment options within the plan. This means your DAF balance can go up or down, depending on market volatility.
Many DAFs have socially conscious investment options. So, if you’re inclined, you can do good with your investments while you’re doing good by giving money to deserving organizations. Win-Win.
One of the greatest values you can pass on to your kids and grandkids is how to help others. It’s fun to get the whole family involved in how to make grants from the DAF. Imagine Thanksgiving where everybody gets to choose where to give $500 or $50 or whatever you envision you can give.
So maybe your five-year old granddaughter wants to give to help puppies. Or your teenage grandson wants to give to help space exploration. Or conservation. Or social justice. Or medical research. The skies (and your imagination) are the limit.
The point is you’ve opened up a family discussion about what you, as a family, value. It can be a celebration of how you share values or how you are different in seeing the world.
You can name successors for your DAF. After you (and your spouse) are gone, your kids (or whomever you name) can carry on the legacy of giving.
Who Offers Them?
There are lots of places that offer DAFs. Today I’ll focus on three large brokerages that offer these plans: Charles Schwab, Fidelity and Vanguard.
Schwab Charitable and Fidelity Charitable both have minimum investments of $5,000 and minimum grants of $50. Additional contributions must be at least $500 at Schwab Charitable.
Vanguard Charitable has a minimum investment of $25,000 and a minimum grant of $500. Additional gifts must be $5,000 or more.
You can learn more at their websites:
There are a few things to keep in mind when you open a Donor Advised Fund:
- You can’t use DAFs for pledges. This is a grey area, but once you give your money to the DAF, it’s irrevocable and the DAF is the one actually making the grants. They don’t want to commit to pledges. So tread carefully here.
- 100% of the gift must go to charity. So no mugs or food or entertainment.
- You must give the money away. Typically the DAF wants you to give at least 20% away every five years.
- You can’t make a Qualified Charitable Distribution (QCD) to a Donor Advised Fund. A QCD allows you to take up to $100,000 from your IRA and give it to charity. But it has to go directly to charity, not a DAF.
- You can give illiquid assets like real estate, privately held company stock, or even the Bitcoin your brother-in-law talked you into buying. The rules for these types of assets vary by each DAF, so if you’re interested, learn more at the specific website.
Donor advised funds are exploding in popularity as a vehicle for charitable giving. It’s easy to contribute, easy to track your charitable contributions, fun to include your family and satisfying to help others.
As you take your charitable giving to another level, you can become more savvy about who you want to give to, how that money is being used, how you can use strategic philanthropy to expect accountability from the organizations that you contribute to. You can start to think about giving larger gifts instead of the shotgun approach as you are blitzed with solicitations.
Learning more about charitable giving can open up a whole new dimension in your life. Donor advised funds just might be the vehicle by which you can do more by doing good.
Copyright © 2019 Stevens Visionary Strategies LLC
The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.