Can a Donor-Advised Fund Supercharge Your Giving?

Presented by Lucas Group Financial Advisors |

If you've never heard of a Donor-Advised Fund (DAF), you're not alone. In a world of IRAs, 401(k)s, HSAs, etc., it's easy to get lost in the jargon. But for someone who's charitably inclined, a donor-advised fund may help you to "supercharge" your giving - allowing you to save on taxes and therefore pass more funds on to your favorite charities. For this reason, DAF's have grown rapidly in the past several years. By the end of 2018, there were 728,563 donor-advised funds in the country, holding over $121 billion in assets*.

So what is a donor-advised fund?

A donor-advised fund is an investment account held by a registered charity, such as Regal Charitable. When you establish the fund and make your first charitable gift, you become the Donor and Grant Advisor to the fund. The funds may then be invested according to your recommendations, and growth in the account is tax-free. When you wish to send funds to your favorite charities, you can recommend a grant from the fund on a one-time or recurring basis. The administrator will first check that your grant is for a 501(c)(3) charitable recipient or other eligible entity (such as a school district). Then, they will send the check to the charity either recognizing you, or anonymously if you choose.

What are the tax advantages?

There are two primary tax advantages to the donor; in addition to these, the funds within the account grow free of capital gains and other taxes.

Income tax deduction

You receive a charitable deduction in the year you donate to the DAF. Therefore, this can be very helpful to people who are either a) looking to offset other income from this year, or b) who typically donate to charities, but don't give enough in a single year to itemize their taxes. If you have the savings or assets to make a large donation in a single year, you can itemize to take advantage of the charitable deduction, and spread the grants over the following years.

For example: Fred and Suzie typically earn $120,000 per year and donate $10,000 to charity. In 2020, the joint standard deduction is $24,800, so they would normally take the standard deduction and wouldn't receive the tax benefits of the donation. However, Fred and Suzie have $40,000 in savings that can be donated to a Donor-Advised Fund in 2020. Now they can itemize their deductions and take full advantage of the $40,000 charitable gift. They can either use this fund to make grants over the next several years, instead of making their normal donations out of income, or they can allow the fund to grow.

Avoidance of capital gains taxes

In addition to donating cash, you also have the option of donating assets such as stocks, mutual funds, ETF's, or even physical property. When donated directly to the donor-advised fund, this allows you to avoid any capital gains on the sale of the asset, while still taking a charitable deduction for the full amount of the gift (as long as the asset has been held for at least one year prior to donation). Once inside the donor-advised fund, the charitable administrator may sell the assets without any capital gains tax.

Example: Fred and Suzie, instead of donating cash, looked to their brokerage account. They had purchased stock ABC about 10 years ago, and their original $20,000 investment had now grown to $40,000. By donating ABC directly to the donor-advised fund, they receive a $40,000 charitable deduction and have avoided the capital gains taxes on  $20,000 in growth. If Fred and Suzie still wish to own stock ABC and have sufficient bank savings, they can then re-purchase stock ABC in their brokerage account and have now increased their cost basis to $40,000.

Please note, all charitable deductions are subject to income limitations. Typically, cash donations can only be deducted up to 60% of AGI, and the deduction for assets is limited to 30% of AGI. If you cannot deduct the entire amount, the excess can be carried forward for up to 5 years.

How do I use the donor-advised fund?

You can set up a DAF through your financial advisor, who can help recommend the best way to finance your donations. You will then have online access to recommend grants to your favorite charities, or can make grants through your advisor. Each one can be made as a one-time or a recurring grant (monthly, quarterly, semi-annually or annually). You choose whether the grant recognizes you or the name of your fund, or if you'd like to make grants anonymously.

Individuals and families use DAFs in a variety of ways, including:

  • Using a DAF to take a large charitable deduction one year, then depleting it over the following years before re-filling it again. This may allow someone to take better advantage of the itemized charitable deduction, if they would otherwise take the standard deduction.
  • Allowing the fund to grow in order to create a resource for future donations. For instance, a couple may add to the donor-advised fund during their working years, so that they can make grants in retirement when their income may not otherwise support their desired giving. As they save into it over time, it also has the ability to grow through investing.
  • Growing a sizeable fund that can allow for a larger one-time grant. Often our local charities or schools need help with large projects, and having the funds in a DAF may allow an individual to grant more for a particular project than they would have otherwise been able to donate from their income or savings.
  • Creating a family legacy fund that they will pass on to their children and create a multi-generational tradition of giving. The original donors have the option of naming successor grant advisors to make grants after their death; for some families, a DAF is much more cost-effective for leaving a lasting legacy than a family foundation. It's also possible to leave donations to a DAF in a will.

How much does it cost?

One of the best aspects of a donor-advised fund is that there is no out-of-pocket cost to the donor. There are no set-up fees, and as opposed to a foundation, a DAF has no annual reporting requirements or tax returns for the donor. Any recordkeeping or investment fees are paid directly from the fund itself, which are often offset by the tax-free investment returns achieved.

Great, how do I get started?

Give us a call today to see if a Donor-Advised Fund is a good fit for your financial plan. Lucas Group Financial Advisors specializes in working with charitably-inclined individuals and businesses, and we can help you create a tax-efficient plan to meet your gifting goals.


*2019 National Philanthropic Trust Donor-Advised Fund Report