If you’re charitably inclined and have a donor-advised fund (DAF), then you already know about the tax benefits. For me personally, I’m having one big regret about my own DAF – not the tax benefits of course (love those), but rather how I invest between the moment contributions are made into it and the point at which money is sent out to my favorite charities.
Quick Refresher
A DAF is like a waiting room for nonprofit donations. You contribute cash or securities to the fund, and take your tax deduction in the year that happens. While your money is in the DAF, it can stay in cash or be reinvested into just about anything (stocks, bonds, mutual funds, etc.). I wrote about three slam-dunk DAF strategies in Donate, Now, Give Later.
Let’s say your annual giving intention is $10,000, and you decide to front load your DAF with 5 years worth of giving to take advantage of the immediate tax benefit in that year. You would move $50,000 to the DAF, then deploy your gifts to charity from the DAF over the next 5 years, or until your DAF is depleted. Depending on your circumstances, you may wish to do this several times during your lifetime.
Investing Within Your DAF
Since your gifts to charities can be spaced out over many years, should you try to get some growth on that money in the meantime? Or should you just leave it in cash? If the money grows in that short window, that’s more you can give to charity. But the opposite is true as well. If you’re determined to give a set amount of money each year for a certain number of years, short-term losses in the DAF will reduce how much you can give over that period. For me, the time horizon “sweet spot” is five years because that’s the amount of time most people seem comfortable committing to a gifting plan.
If you apply the same logic you do to the risk you take with your nest egg money, and you are determined to donate all of your DAF money within five years, investments that require a long-term commitment (stocks and real estate) have no business being in your DAF account. Therefore, you are better off with interest-bearing investments (CDs, bonds, money market funds).
A WIN-WIN Option
A donor-advised fund is, by its very nature, about your values. So, for me, creating impact becomes the primary objective from the time the money is in the DAF until the last dollar gets sent to a charity. One example of this (yes, I use it myself) is the Calvert Foundation’s WIN-WIN initiative, which invests in organizations that develop and market clean technologies and energy solutions for women in the developing world – it’s an intersection of women, clean energy, and poverty. Knowing that this money is put to work in such a way makes me care very little about whether or not the financial return exceeds what it would get if it was invested in bonds, for example.
WIN-WIN is just one of many impact-oriented investments out there for donor-advised funds. If this idea strikes a chord, I invite you to talk with your advisor about how your dollars can be doing good while they are in a charitable giving waiting room (your DAF).
Happy planning,
Barrett
Abacus Wealth Partners is an SEC Registered Investment Adviser. A copy of our current written disclosure statement discussing investment risks, our advisory services, and fees is available for your review upon request. The information presented in this blog is for informational purposes only may not be suitable for all investors. Nothing in this publication should be construed as investment, legal or tax advice.
