Donor Advised Funds

Donor Advised Funds (DAF) are a simple, flexible and tax-advantageous way to gift to TFS and other organizations you may support. For these reasons, they’ve grown in popularity in recent years. 

 

A DAF is essentially a charitable account with an investment option that makes gifting and donating easy. Donors can gift cash, investments or other assets to a DAF to initially fund it. When done properly, funding a DAF counts as a donation to charity which may decrease your taxable income. Generally, cash donations to DAFs can lower adjusted gross income up to 60% and securities donations (stocks, mutual funds, etc.) can lower adjusted gross income up to 30%.  

 

Once the DAF is funded, you can decide when and how much to gift from the DAF to charity. If you fund $10,000 of cash into a DAF, you may decide to only gift $5,000 out of it in one year and leave the rest for future years. Although you only gave $5,000 to charity in year one, you’re generally still eligible for a tax deduction of $10,000 in the year you funded the DAF. This flexibility of gifting, with the up-front tax benefits of funding, is one reason DAFs have become popular. 

 

While cash is an option for funding your DAF, many people fund them with appreciated securities to receive a larger tax deduction. For example, if Steve and Sue wanted to gift $2,000 to charity, they may want to use cash. However, if they use appreciated stock in their investment account instead, they may be able to avoid paying taxes on the stock’s gains. If their stock, XYZ Technology, grew from $1,000 to $2,000 over five years, they could donate XYZ stock instead of cash, thereby avoiding the capital gains embedded in it. If they still wanted to own XYZ Technology, they could use their cash of $2,000 to purchase it again. This gives them a $2,000 tax-deductible donation into their DAF, plus they avoided long-term capital gains, and they still own the same number of shares in XYZ. Donating XYZ stock was superior to donating cash. 

 

Some DAF accounts can also accept funding from private company stock (C-corp and S-corp stock), LLCs and partnership interests, private equity, restricted stock, life insurance, cryptocurrency, oil & gas royalty interests, and more. 

 

Many financial professionals are familiar with how to set up DAF accounts, as well as how to transfer cash or securities into them. If you aren’t sure how to complete these transactions, let us know and we may be able to find someone who can help. 

 

One unique feature of DAFs is the ability to invest the dollars after they’ve been funded into the DAF. If you fund a DAF with cash or securities worth $10,000 in year one, you may decide to invest half of it in growth-oriented investments and the other half in money market. Like 401(k) plans, many DAFs have a menu of investment options. The $5,000 in money market could be used for upcoming gifts to charity out of the DAF, while the $5,000 in growth-oriented investments may grow for future gifts in years two, three, four, or longer. This tax-free growth within the DAF may allow you to give even more to charity. 

 

Lump-sum gifting to exceed standard deduction – After the Tax Cuts & Jobs Act of 2017, the standard deduction taxpayers are allowed to use on their tax returns increased to the point that many no longer benefited from itemizing their taxes. This also meant that tax-deductible gifts to charity no longer benefited them if they weren’t able to itemize. However, by using the “lump-sum gifting” strategy within a DAF, someone may be able to exceed the standard deduction and enjoy the tax benefits of charitable giving. 

 

For example, Bonnie and Ben usually give $2,500 to various charities each year. They don’t have enough deductions to itemize, which means they’re giving to charity without the potential tax benefits of itemizing. However, they decide to set up a DAF and fund it with four years’ worth of charitable gifts ($2,500 x 4 = $10,000). They can fund this $10,000 with cash, appreciated securities, etc. By doing this, they may be able to exceed the standard deduction on their taxes and enjoy a higher itemized deduction that year. After the $10,000 goes into their DAF, they can begin to send $2,500 out of it each year to the charities they support, just as they had planned on doing anyway. This gives them a larger tax benefit for the same charitable giving goals.