How to Maximize Giving and Save on Taxes with Donor Advised Funds

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Please note the publish date of this blog. Financial information, market conditions, and other data mentioned in this post may no longer be accurate or relevant.

As you accrue wealth, it feels rewarding to give back.

Despite the financial turbulence many people felt in 2022, this time of year is full of beautiful examples of generosity and community-building efforts. In fact, Nonprofit Source reports that 30% of annual giving occurs in December, with 10% occurring on the last three days of the year.

Giving back by donating to charities positively impacts the world and helps you leave a legacy by setting an example of generosity for future generations.

The practice also isn’t just “right” – it’s likely to help your financial plan. This time of year, in particular, it’s pragmatic to give back strategically to lower your taxable income and potentially reduce your tax bill come April. 

While there are many ways to give, a popular method of giving is a Donor-Advised Fund or DAF. DAFs have snowballed in recent years because of their convenience and tax benefits. They enable you to use a wide variety of assets to support charities you care about. 

Here is why DAFs are so popular, how you can maximize the benefits, and some potential drawbacks you may want to consider.

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DAFs in the United States 

Donor-Advised Funds are rapidly rising in popularity. 

From 2019 to 2020, the National Philanthropic Trust reports there was a 20% increase in the number of DAF accounts registered at national charities. As of 2020, there were 864,099 active accounts.

The report also found that over 10% of U.S. giving in 2022 was done via a DAF, at nearly $50 billion dollars!

DAFs are so valuable because you can:

  • Take an immediate tax deduction upon donation
  • Enjoy tax-free growth, thereby amplifying the financial value of your gift
  • Use one fund to donate to multiple charities
  • Give on your own time – you decide when and to whom your donations go 

Not to mention, if you exceed the 2022 tax-deductible giving limits for a DAF (up to 60% of your adjusted gross income (AGI) when donating cash or 30% when donating non-cash assets), you can roll that tax deduction to the next year for up to five years. So if you give more than you’re able to deduct from your AGI, DAFs allow you to carry that excess amount forward to reduce your AGI and save on taxes in future years.

Most people use DAFs to give to a charity of their choice, whether it be an environmental cause, education, or a religious institution. As long as the charity is a registered IRS-qualified public charity (501c3), you should be able to support it through your Donor-Advised Fund.

You can open a DAF with the help of your financial advisor. Be sure to discuss your charitable goals with your advisor ahead of time. That way, they can ensure your preferred charities are already approved by the DAF you want to use. Doing so will help you avoid any unnecessary hassle.

What is a DAF, Exactly?

Think of a DAF as a charitable investment account. 

You can open a DAF at virtually any major investment company such as Fidelity Charitable, Vanguard Charitable, The National Philanthropic Trust, or Schwab Charitable. 

DAFs usually offer flexibility and allow you to contribute various assets, including cash, investments, real estate, and sometimes even cryptocurrency. They will usually charge a fee for each transfer into the account. For instance, Fidelity Charitable charges $100 or 0.6% (whichever is greatest) for the first $500,000 of donations to its fund.

Even with fees, donating to DAFs can still be a financially savvy move. Many wealthy individuals use DAFs to avoid the expensive costs and legal implications of establishing their own charity or foundation.

When your money is pooled in a DAF at your financial institution, you can “recommend grants,” meaning distribute cash to a charity as you choose. Nowadays, you can recommend a grant with the click of a button on your financial institution’s online account, and they will send you an email confirmation once the funding goes through. 

Here’s a visual overview from Kitces on how these accounts work. 

Graphic of Donor Advised Funds

How DAFs Work 

Once you’ve opened your DAF with the help of your financial advisor, you can contribute appreciated assets, stocks, collectibles, cash, and more into the account. 

The funds can sit in the account for as long as you’d like and grow tax-free. 

DAFs are designed to accommodate strategic giving, and one excellent strategy is “bunching” donations to DAFs. 

Say you can’t itemize your donations each year because the standard deduction is so high ($12,950 for individuals and $25,900 for married couples filing jointly in 2022). You can decide to frontload three years’ worth of contributions to your DAF, take the tax deduction, then spread the grants out over the set period. 

You’re still giving at the same cadence, just taking advantage of the tax benefits.

Another excellent application for DAFs is creating a family tradition of giving. Let each member of the family research and recommend a set amount of donations every year, and get your family involved in giving intentionally on a regular basis.

Whatever money you donate during a given year is tax deductible, so if you have the means, be sure to donate to the limit of your personal annual deduction.

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Key Benefits DAFs Bring To Your Giving Efforts

Arguably the most significant benefit of DAFs is the immediate tax break upon contribution. 

Let’s say you receive a large inheritance or strong market returns. Putting a considerable sum of that money into a DAF can help you avoid a significant tax burden while sponsoring your giving for decades to come. You can even donate long-term appreciated assets to a DAF instead of liquidating them, which can help you manage your capital gains liabilities.

However, remember that you’ll only realize the full tax benefits if you itemize the donations on your return. 

Before you donate, keep in mind that donations are irrevocable, meaning you can’t withdraw money from a DAF once you place it in the fund. The only way to move that money is into a registered charity of your choice.

Besides the tax benefits, DAFs also allow for flexible giving.

You can easily control the cadence of your gifts, giving as often or infrequently as you like. This could promote year-round giving or giving on special occasions. You could even make it a family tradition to give together monthly, or perhaps on certain holidays.

However you decide to give, DAFs help you maximize the value of your gift. As your assets can grow tax-free, you can ultimately give more to the charities you wish to support.

Finally, DAFs are an incredible tool for legacy planning: 

  • What causes do you care the most about?
  • What are your values as a family?
  • Where do you and your family volunteer? 
  • Are there charities you wish to continue supporting after your passing?

You can make a single bequest in your will to instruct the DAF sponsor to give to one or multiple charities upon your passing. With this option, you can also specify how much and how often money should be donated.

Drawbacks to Consider Before Opening an Account

While DAFs can accelerate giving for many families, they aren’t right for everyone. Here are some downsides to using DAFs when facilitating charitable giving efforts. 

First and foremost, many DAFs have high minimum account balances (often upwards of $5,000 to $10,000). 

This means that your account balance can’t fall below that number without a fee. Such a significant amount could prohibit families from making the donations they’d like to or having enough funds to maintain the account long-term. 

Generally, DAFs are relatively simple to operate, but sometimes they can be expensive to set up and maintain. Because of this, make sure you are crystal clear on any administrative and ongoing account fees that could affect your giving.

Another important consideration is the permanence of the donations. Once you put an asset into a DAF, you cannot take it out. If you’re in a financial crunch, this can put you in an unfortunate position. 

To avoid any conflicts, talk to your financial advisor about how much to contribute to your DAF, ways you can diversify your portfolio, and how much you should save in your emergency fund.

Overall, there’s far more to like about DAFs than drawbacks, but it’s still prudent to speak with your financial advisor about what DAF they recommend. 

Finish the Year on a Good Financial Note

The holidays can be a busy time, but it’s also a time for getting your house in order, reflecting on the past year, and making positive changes to start the next year off right. 

One of the best things you can do for yourself is to ensure you are using the right tools at your disposal to maximize your giving while saving on taxes. After all, it pays to be aware of sound financial moves that save you money.

Schedule an introductory call today with an Abacus financial advisor to see if we can help you bring you fulfillment on your giving journey.


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