Maximize Your Giving with a Donor Advised Fund
When it comes to giving, the #1 question I get is “what’s the right amount to give?” A less frequent question but almost important decision is “what’s the right way to give?” In addition to being able to give by cash, check or credit card, there is a powerful tool known as the Donor Advised Fund (DAF) that you should be aware of if you’re not already.
What is a DAF?
A DAF takes the concept of a foundation and makes it available to normal folks like you and me. You might be familiar with private foundations such as the Bill and Melinda Gates foundation. Unfortunately, private foundations often take several millions of dollars to make practical sense.
A DAF, on the other hand, is associated with a public foundation such as the National Christian Foundation (www.ncfgiving.com). The public foundation has separate accounts (or “funds”) which are established by individual donors. The donors then direct the proceeds to charities they want to support. For a low monthly fee, you can have your own fund that operates much like a private foundation.
How Does a Donor Advised Fund Work?
A donor advised fund works much like a bill-pay account for charitable giving. The first step is to open a giving fund. You can choose the name, whether it’s the Terry Family Giving Fund, or the Go-Heels-I-Love-Roy Fund. Just keep in mind that when charities receive grants from your fund, that’s the name (unless you choose to give anonymously) that will appear on the check.
You then make a charitable gift of cash or appreciated investments into your fund. When you make contributions to your account, you get an immediate tax deduction. Once the funds are in your DAF, you can leave them in a money market account, or invest them to grow over time.
When you’re ready to give to charity, you can make one-time or recurring grants to your favorite charities. You can usually give to any 501c(3) organization, and even support individual missionaries.
Why Would I Use a Donor Advised Fund?
There are many benefits to a Donor Advised Fund, but here are a few of my favorites:
- One receipt for tax purposes – If you give to several different charities throughout the year, this can create a tax-time headache. When you give through a donor advised fund, however, you only need one receipt for taxes.
- If you get paid larger bonuses – Often times givers will want to give a percentage of their income to charity. Sometimes they want to set aside giving dollars without knowing exactly where or when they will give. A donor advised fund allows you to designate the giving funds, receive the tax deduction on the front end, and make the grants when you’re ready.
- Avoiding capital gains – One of the biggest benefits is the ability to use appreciated stocks, real estate, or business interests for charitable giving. In addition to the normal tax deduction for the gift, you also avoid any built-up capital gains associated with the investment.
- Ability to modify your estate giving – If you want to designate a portion of your final estate to church or charity, consider using a DAF. If your charitable desires change in the future, then instead of having to redo your will you can simply modify the recipients via your DAF.
- Take advantage of the higher standard deduction – The standard deduction has been raised to $24,000 for married couples and $12,000 for single filers. Folks that had always itemized their deductions may be able to take advantage of the higher standard deduction by “lump gifting”. Lump gifting involves doubling up on the amount you give every other year (often by contributing that much of appreciated stock to a DAF). This gives you a much larger itemized deduction in those years and allows you to take the standard deduction in the off-years. There are some intricacies here, so please consult your tax advisor or financial planner before attempting to implement lump gifting.
So if you have appreciated investments, give to a variety of organizations, get bonuses, or want to be more tactical with your giving, a DAF could make a lot of sense for you. Check out this great video from National Christian Foundation for a great summary.