Do you have charitable intent? Maybe you are already an active donor. Do you generate a high annual income and want to take advantage of the greatest allowable deduction? Do you like the idea of a private foundation but don’t want the complexity, burden, and expense of its administration? Do you want to give anonymously? Do you own liquid assets, such as stock, mutual funds, etc., on a low-cost basis and don’t have a plan to sell them? In other words, do you want to organize your charitable giving more efficiently?
As a Financial Advisor, I often hear this question: “What is the best way to donate money to a charity?” The reality is there isn’t just one right answer. There are a few different tax-efficient ways to donate your money, which certainly depends on your specific situation, but today, I want to focus on giving through a Donor Advised Fund.
What is a Donor Advised Fund (DAF), and who should use them?
A Donor Advised Fund is a charitable giving account established for future giving while receiving a tax deduction immediately upon the contribution. Essentially, a DAF is like a charitable bank account. Once you place your money or asset into the DAF, you immediately qualify for a tax deduction for that year. Those funds then sit in the DAF until you are ready to donate to the non-profit or social venture of your choice.
Here is a list of the most common examples of when DAFs are used:
Liquidity event (selling business, appreciated assets)
Unexpected income (bonus, inheritance, etc.)
Capital gains management in a brokerage account
Custom indexing
Charitable bunching (example below)
Retirement planning
Multi-generational giving
Here are some interesting stats about DAFs:
There are roughly $234 billion in DAFs
Approximately 10% of all gifts given to charities come from DAF’s
Nationally, the average DAF size is approximately $183,000
In 2017, just over $30 billion was contributed to DAF, which has almost tripled in the last six years.
Tax Benefits of a DAF
One of the great features of the DAF is the fact that you qualify for a tax deduction in the year that you make the contribution to the donor-advised fund. Yet, you still have the flexibility to choose the timing of your donation to your chosen non-profit or social venture. Simply put, you get the opportunity to optimize the timing of the tax deduction AND the donation to the charity.
Important Tax Benefits:
Up to 60% AGI tax deductibility (cash)
Up to 30% AGI tax deductibility (public securities)
All securities deducted at Fair Market Value
Example 1
Donor with AGI of $100,000
Donor contributes $80,000 cash to a DAF
$60,000 is the max deduction the donor can take in this year, reducing AGI to $40,000 (60% * $100,000 = $60,000)
$20,000 can be carried forward up to 5 years for deduction
Because the standard deduction in 2023 was $27,700 (married filing jointly), the donor in this example benefited from the contribution to the DAF by $32,300 ($60,000 - $27,700 = $32,300).
Example 2: Charitable Bunching
Assuming $20,000 donations per year in the 24% marginal tax bracket
Limitations of Using a DAF
To ensure the integrity of the social impact, there are restrictions on how funds in a DAF may be used:
Must hold less than 20% ownership interest (voting stock)
May not invest in businesses with ownership interests of disqualified persons:
DAF managers (including trustees, directors, officers)
Substantial contributors to DAF
Family members
Cannot participate in self-dealing
Cannot make grants to individuals (i.e., a direct individual scholarship)
Donors may not receive personal benefits from the transaction
In conclusion, if you are charitably inclined and have the means to donate some of your hard-earned money (or an inheritance), please talk to your advisor today to see if a Donor Advised Fund may be right for you. If you don't have a financial advisor, we have a team here at Whitaker-Myers Wealth Managers who can help talk through your specific situation.