By Stephen Hassell, CFP®
If you are reading this, it is likely because you either already gift to charitable organizations or would like to begin doing so in a more disciplined and meaningful way. While time is ultimately a gift that many organizations cherish, this article will focus on streamlining the gifts of financial assets to your favorite charities. Donor-advised funds (DAFs) can help serve as vehicles for giving that make the act more systematic and organized. A DAF can also accommodate a wide range of needs over your lifetime and beyond.
What Is a Donor-Advised Fund?
A donor-advised fund is a giving vehicle held with a public charity that allows you to contribute funds and make grants (or gifts) from your account balance to the charity of your choice on a schedule that suits you.
The contribution made into the DAF is considered a completed gift. That means you will receive the tax benefit of giving at the time of your contribution to the DAF, not when you send money to the charity you choose to support.
Several organizations administer programs like this. I have included a few that you may consider checking out:
Of these organizations, Fidelity Charitable is one of the largest and is the platform that we currently use when working with clients who wish to engage in charitable giving through a donor-advised fund.
Should You Use a Donor-Advised Fund?
If you are supporting mostly one or very few organizations and tend to gift the entire amount in the same year (and not retain any amounts for future gifts), it may not make much sense to set up a DAF.
Also, if you are using your required minimum distribution (RMD) from a retirement account to gift to charity, a DAF cannot receive funds from an IRA. Those gifts, known as qualified charitable distributions (QCDs), must be made directly to a charity.
However, a DAF may be just right for you if you want to:
Have greater flexibility with your gifting
Reduce the administrative burden of managing gift receipts for tax-reporting purposes
Build a legacy of gifting throughout your life
Below are some of the many benefits of using a DAF:
Receive a tax deduction when you want/need it: While you may not know the amounts or timing of gifts you want to make to certain organizations, you may know that you want to make a donation. When you use your DAF, you can make the gift to your DAF at any time and it is considered a completed gift, even if you have not distributed it to the charity of your choice.
Gift when you are ready to do so: Because the contribution to your DAF is the gift, you can choose to delay gifting to the actual organization to some later date. This allows you to make giving a habit without necessarily deciding what organizations you wish to support or the precise timing of those gifts.
Invest and grow your giving account over time: Think of a DAF as your own mini-foundation. If you are not ready to gift or plan to give only a portion of your DAF account balance, you can choose from a number of investments to suit your growth objectives. You can allow these funds to grow over time, giving you a larger amount to gift in the future.
Create a legacy of gifting: Establishing a DAF allows for co-owners and successor owners so that you can establish a legacy of gifting in your family long after you are gone.
Ease administration of gifts: All gifts are managed through the online portal for your DAF. You can make grants with a click of a button. You can also see reporting over time regarding amounts and organizations to whom you have made gifts without the need for tracking receipts from every gift made.
Allows for anonymous gifting: Because the gift is coming from the DAF provider (e.g., Fidelity Charitable), you can maintain privacy by making gifts anonymously. Or you can receive recognition for the donation if you prefer the recipient to know who you are. The choice is yours.
Introduce others to the power of giving: Through programs like the Fidelity Charitable Gift for Giving program, you can provide others the opportunity to give to the charity of their choice using funds from your account. This may be a great solution for getting kids or grandkids involved in a discussion about giving back to causes they care about.
Gift appreciated investment assets: If you have a taxable investment portfolio that has embedded gains, you can make gifts of appreciated shares to your DAF. The DAF will then sell the investments, allowing you to defer taxation on those gains. There is also the potential to make gifts of other complex assets, like real estate and business interests. Learn more about what you can donate to a DAF.
How Does the Process Work?
Determine that you are a candidate to use a DAF for your giving and that the organizations you wish to support are 501(c)3 organizations. You can use platforms like Charity Navigator to help you find 501(c)3 organizations and do additional research on them prior to giving.
Set up your DAF with the provider of your choice.
Fund your DAF with money regularly or as you are able.
Invest your DAF account balance if you do not plan to gift the money to charity in the near term.
Make grants on a named or anonymous basis and on a one-time or recurring basis, as desired.
Communicate your contributions made into the DAF to your tax professional so that you receive the appropriate tax deduction for your gift.
If you want to explore the inner workings of the Fidelity Charitable platform, you can explore a demo to see some of the features you would have available to you.
Ultimately, gifting is a matter of the heart and unique to each individual. Charitable gifting can be coordinated in the context of a comprehensive financial plan to ensure that you are gifting in a way that is optimized with your financial goals.
If you want to learn more about how our Houma, La. financial planning firm supports clients in their charitable gifting, please reach out and we would be happy to discuss.
Schedule a complimentary 30-minute discovery call with a fee-only financial advisor to discuss your financial situation.