Donor Advised Funds (3x Tax Benefits)

Donor advised funds (DAFs) are personal charitable investment vehicles that can provide you with triple tax benefits

Strategy Overview

A Donor advised Fund (DAF) can reasonably be thought of as your own personal charitable investment account. Most major brokers/custodians have charitable divisions that offer these types of accounts, and because they are charitable accounts, DAFs have a number of tax benefits (deductible contributions; no long-term-capital-gains on donated stock; tax-free investment gains).

Strategically, DAFs can be used stand-alone (given the potential triple tax benefits), or in combination with other tax strategies, such as "pulling forward" future charitable as a part of a income tax deduction stacking strategy.

Tax Details

Many large custodians like Schwab, Fidelity, and Vanguard have charitable divisions that allow you to setup a DAF (typically with no minimums). Each of these divisions within a custodian are setup as a 501(c)(3) public charity, which allows the accounts to provide the three primary tax benefits detailed below.

As for giving, when a DAF owner is ready to make a charitable gift they simply provide the DAF custodian with the registered charity's name/information and the amount you'd like to gift. The DAF custodian then writes/sends a check (in your name, if desired) and deducts the associated amount from your DAF.

Collectively, the benefits of a DAF allows individuals/households who are charitably inclined to help manage their income tax brackets through the optimization of income tax deductions, including the "pull forward" of multiple years of anticipating charitable gifts into a single year for tax optimization purposes.

For More Information: The Schwab Charitable Website has a lot of great information and resources on Donor Advised Funds.

Key Benefits

• Donations to DAF are tax deductible. The amount you donate to your DAF is tax deductible in the year of contribution (except with regard to any IRS donation deduction limitations).

• Avoid capital gains tax on donated stock. If you donate appreciated stock, you're able to (i) deduct the full value of the contributed stock (except with regard to any IRS donation deduction limits), and (ii) avoid paying long-term-capital-gains-tax on the appreciated portion.

• Tax-free growth inside a DAF. Funds contributed/donated into your DAF can be invested according to your desired allocation, and all investment gains within the account are tax free.

Key Considerations/Flags

• IRS limits on charitable deductions. The IRS imposes limits on the size of the charitable deductions you can claim in a given year as a percentage of your adjusted gross income (AGI). These are generally limited to 60% of AGI if cash is gifted/contributed, and 30% of AGI for appreciated stock.

• Irrevocable donation. Once assets are donated to a DAF, the donation is irrevocable. You retain advisory privileges over the investment allocation and distribution of the funds, but the funds are no longer yours and you cannot retrieve the donated assets.

• Administrative fees. DAF sponsors typically charge administrative fees. These fees vary by sponsor and should be considered as part of your charitable giving strategy.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• If you're charitable and have appreciated stock. If you're considering making sizable charitable donations, particularly of appreciated assets, using a DAF can multiply your tax benefits. By donating appreciated assets, you avoid capital gains tax that would otherwise be due if you sold the assets, while receiving the full value of the stock as a tax deduction.

• As part of an income tax deduction strategy. If you're charitably inclined, utilizing a DAF to stack income tax deductions is a tool that can help increase your after-tax wealth.

🔴 When to Not Use This Strategy:

• If you need the funds. This is another "Captain Obvious" statement, but despite you having an "account" with some control, funds contributed to a DAF are irrevocable. If you need any portion of the funds for any purpose, you should not donate them.

• If you're not charitably inclined, or give sporadically. If you generally do not donated to charity, or your charitable giving is generally more spontaneous in nature, the account setup and administrative overhead of a DAF are likely not be worth the potential tax benefits to you.

Example