Maximize Your Giving With a Donor Advised Fund

We are lucky to say that we have some wonderfully generous clients and getting to help them give to charities is one of the best parts of my work.

There are so many ways to be generous too!

One of the ways to give to charity that has been getting more media limelight lately is the “Donor Advised Fund” or DAF. 

It sounds complicated. Perhaps like something only major philanthropists use.

In reality, a DAF is one of the simplest, most flexible and most tax-efficient tools available for charitable giving.

Today, I would like to spend some time demystifying this incredible fund option.

What Exactly Is a DAF?

Think of a DAF as your own personal charitable savings account.

A DAF is an investment account established under a larger, established public charity (the "sponsoring organization"), such as Schwab Charitable or your local community foundation. 

You make an irrevocable contribution of cash or appreciated stock into this account.

The money is invested and grows over time, tax-free.

You recommend grants from the account to your favorite IRS-qualified public charities whenever you want.

There is no limitation on how much or when you can contribute from your DAF.

Even better, most DAF platforms make it very easy for you to send checks to your favorite charities with just a few clicks on their website.

What Are the Benefits?

Tax Benefits

One of the most useful details about DAFs is that you get a tax deduction in the year you contribute the funds into the DAF.

You can give the money out to charities later, even years down the road.

What’s even greater is that you can use DAFs for a strategy called “bunching.”

Here’s how it works.

Because the standard deduction is quite high, many people struggle to itemize their deductions every year.

Bunching allows you to consolidate two, three, or even more years' worth of charitable contributions into a single year.

This "bunched" donation needs to be large enough to push your total itemized deductions above the standard deduction threshold. 

That’s already pretty great.

But what’s even better is that if you donate appreciated stock directly to your DAF, you get a tax deduction for the full market value of the stock and entirely avoid paying capital gains tax on the appreciation.

This is significant savings compared to selling the stock, paying the tax, and then donating the remaining cash.

And the cherry on top?

Any investment growth within the DAF is tax-free, meaning more money goes to your causes.

Flexibility & Simplicity

You can donate now (and get the deduction now) but take your time deciding which charities to support later.

You can also make one large lump-sum contribution but use the DAF to send smaller, consistent checks to charities every year, funding their mission reliably.

For example, if you contribute $30,000 to a DAF this year, you can claim the full $30,000 deduction on your current tax return, even if you decide to distribute only $5,000 to charities each year over the next six years. 

This is perfect for high-income years, business sales or times when you experience significant appreciation in the value of your portfolio.

The sponsoring organization handles all the record-keeping, due diligence on the charities and tax documentation.

You only track one receipt (your contribution to the DAF), not dozens of small receipts from various charities, which I know can be problematic in some cases.

But it can’t be this good, right?

Well, there are two rather significant considerations before you decide to create a DAF.

First of all, it usually makes more sense to do it for larger donations (i.e., “bunching”).

At least in my experience, the DAF contribution needs to be at least $25,000 to make sense from the tax perspective for the reasons I mentioned earlier.

Not everyone, even those who have significant charitable intent, wants to gift this much money all at once.

The second issue is the fact that you need to work with a qualified CPA or financial planner to calculate the DAF contribution. 

I wouldn’t recommend it to those who handle their finances on their own as there are many technical nuances when you do the actual calculations.

In Summary

For many individuals seeking a highly efficient, hands-off approach to philanthropy, the Donor Advised Fund is a great choice.

It removes the administrative burden of running a private charity while supercharging your ability to give strategically and maximize your tax savings.

Maybe this all sounds pretty interesting to you, but you’re just looking for ways to give to your family members.

No problem at all!

Check out our newsletter titled “Thinking of Gifting Funds to Family? Here are Our Top Ideas!”