If you are thinking about making charitable contributions this year, you’ll want a good answer to the question “What is a donor advised fund?” That’s because such funds can save you time and possibly a great deal of money. They allow you to take one appreciated asset and get a full tax deduction for its market value (without selling it) and divide up the money to any number of charities. For the right person, this is far better than tax deferral. So how does one fund do all this?
I can best explain by way of walking through a few examples. Let’s assume you want to donate $10,000 to your favorite charity this year. Rather than write a check, you donate shares of XYZ Company (or mutual fund). Assume you paid only $3,000 for the shares, but they are now worth $10,000. If you sell the shares and then write a check, you’ll have to pay tax on the $7,000 capital gains. As a result, you won’t have $10,000 to donate, but $10,000 – (20% of $7,000), or $8,400. This stinks.
But there is a much better way to save time and get the full $10,000 tax deduction without raising any audit flags. Give the shares to the charity instead. This is one great way to capture capital gains tax relief. They will sell the shares for $10,000 and use all the money for worthy causes. And you get a full $10,000 tax deduction too. Sweet.
You can use this maneuver to shelter up to 30% of your adjusted gross income every year. In order to make this happen, all you have to do is call the charity and tell them what you are planning to do. They’ll send you the brokerage account information as well as the “DTC” number. Then just give this information to your brokerage firm or financial advisor and they’ll take care of the transfer.
What if you want to donate to multiple charities?
If you want to donate to multiple charities with that same $10,000, the procedure mentioned above is cumbersome. That’s where donor advised funds come in.
These are programs administered by large mutual fund companies and charitable organizations. If you want to go this route, simply transfer the appreciated shares to the donor advised fund (DAF). As soon as the transfer is received by the fund, you can claim the full deduction. When the fund sells the shares, there is no tax consequence to you. Once the sales are made, the fund will invest the money in the various funds offered by the plan. You get the deduction immediately and then have all the time in the world to decide which charities to name. Once you decide who you want to donate the money to, you simply tell the fund the names of all the charities and the amount each charity is supposed to receive.
Keep in mind that when you donate to a donor advised fund, the fund company isn’t required to donate to the charities you name, but they usually do. Make sure you check with the fund to understand how that works. Many require that the designated charity be a tax-exempt 501(c)3 organization.
Why do companies offer this service?
Well, if you use a donor advised fund that is offered by one particular charity (like a religious organization or a university), they typically require that a certain percentage of the assets be donated to their own particular organization.
Mutual fund companies offer donor advised funds because they collect fees on the funds they invest in after they sell your appreciated assets.
Are donor advised funds for you?
If you want to donate appreciated shares or assets to a variety of charities, this is a no-brainer. I can’t see any reason why you wouldn’t take advantage of this.
Do you make charitable donations? Would a program like this work for you? If not, why not?
Vernon Groston says
Great introduction to Donor Advised Funds! However, please note that DAF’s are not just with fund families, they can also be with local community foundations or programmatic foundations (like faith based foundations or college institutions). In some of those cases, a certain percentage of assets may need to stay as a gift to the foundation that is holding the Fund as a gift. Other times the succession of the advisers may be limited to a single generation. Also, some providers may allow gifts of closely held stock from private businesses and high-end real estate. This can help with overall estate planning.
Neal Frankle says
Vernon, Great and helpful comment.
Laura Malone says
Neal, what a great intro article! As a national, independent DAF solution, I would like to add one thing…….the ability to grow and compound their charitable wealth. The value most of our clients see is that they can continue to work with their trusted financial advisor to apply the same strategies to their personal wealth to growing the charitable assets they have. The increase in the overall benefit to their favorite organizations can be wonderful.
I have had a donor advised fund and Vanguard Charitable for 6 years. I love needing to track only one donation for tax purposes.
Further the ease of recommending charitable GRANTS to the charities themselves is done online. Click, click, click and 6 charities get my grants to them for the year. Big timesaver.
Plus my funds at the donor advised fund are invested 25% in equities and ofter grow beyond the absolute dollars I put in there to begin with.
Neal Frankle says
Ann, You point out additional benefits indeed. Glad this has worked well for you. It seems a great way to go for the right person. Thanks,