Is a DAF Right For Me?
April 1, 2021 - Donor-advised funds (DAFs) are vehicles that allow individuals to maximize their charitable impact by giving in a tax-advantageous way. As the vehicle continues to grow in popularity, perhaps you have wondered, "Is a DAF right for me?" In this series, we will highlight case studies of individuals who chose to give through a DAF and why. Among the various benefits we will consider below, perhaps you will find one that is applicable to your circumstances or charitable goals.
Fred had appreciated stock that he wished to donate to charity, but his charity of choice was not equipped to receive noncash assets. Fred was planning to sell his appreciated stock, pay the capital gains tax owed on the sale, and donate the after-tax proceeds to his selected charity. Then he learned that publicly traded securities and illiquid gifts that have been held over a year are not subject to capital gains tax when contributed to a donor-advised fund. Fred opened a DAF and was able to contribute his appreciated stock at fair market value to the fund, avoid capital gains tax exposure, and eventually make a grant from his DAF to his selected charity in the full amount of the contributed stock’s fair market value.
Avoiding capital gains tax exposure by contributing appreciated noncash assets to a DAF means more money goes to charity when granted. If you have noncash assets, like stocks, securities, real estate, or cryptocurrency, and you wish to benefit a charity that is unequipped to receive them, a DAF might be right for you.
Alice knew the benefits of smart investing. A few years ago, she placed a modest amount of savings in an investment account and, although there were the expected short-term ups and downs along the way, she watched that initial amount grow over time. When Alice first heard of the donor-advised fund, she was intrigued by the possibility of investing for growth her charitable giving. She opened a DAF and began making contributions, which were invested according to her charitable goals. She watched her contributions grow and in time, Alice was able to make much larger grants to her charity than she otherwise would have but without owing any tax on that growth. She felt as though she had contributed a sapling but was able to give an orchard.
DAFs allow people to build up money for charity in a tax-advantaged way. If you are interested in investing your giving for tax-free growth, a DAF might be right for you.
Cindy’s charitable giving each year was typically what allowed her to itemize her taxes. But when the standard deductions for taxes were raised in 2017, she was no longer able to meet the threshold to claim a charitable deduction. She decided to “bundle” her charitable giving with a DAF. She contributed several years’ worth of charitable donations in a single year to reach and claim the charitable deduction, then she waited that period of time to contribute again. In the time between her contributions, she continued to support her charities each year with grants from her DAF.
Charitable giving can only reduce your tax bill if you choose to itemize and, generally speaking, you only choose to itemize when you expect your deductions to add up to more than the standard deduction. If you are no longer able to realize the benefit of itemizing your taxes and you’d like to consider bundling your charitable contributions to meet the deduction threshold, a DAF might be right for you.
Peter and Audrey had worked hard to build their business from scratch and last year, they were able to sell it for a sizeable profit. Knowing there would be substantial tax consequences for this financial windfall, they chose to contribute a portion of their proceeds to their DAF, thus lessening their income tax burden while also prefunding years of charitable giving.
A financial windfall is when you receive any amount of income over what you typically receive, whether it’s a significant inheritance or strong market returns. If you are expecting a financial windfall, a DAF might be right for you.
John and Nancy were newlyweds with philanthropic hearts. As they built a life and home together their first year of marriage, they also discussed their charitable goals. At year-end, they were still researching and vetting the charities with which they hoped to become involved. John and Nancy decided to open a DAF so they could go ahead and make their charitable contributions and receive their tax deduction even while they continued their due diligence. The money was in the DAF and ready to be granted once John and Nancy determined which charities they wished to support.
Contributions to a DAF qualify for a tax deduction in the year they are contributed. If you wish to realize the charitable tax deduction of a contribution but need additional time to decide which charities to benefit, a DAF might be right for you.
Rather than focus his charitable giving on a particular nonprofit, Jamal liked to spread out his charity. He wished to support in some way as many organizations as he could that were dear to him and near to him, whether the listener-supported radio station he regularly tuned in to on his commute to work, the local food bank where he volunteered, his alma mater, or the area children’s hospital. He was quick to respond to needs when he became aware of them, eager to write checks at nonprofit fundraisers. Keeping track of all the donation receipts throughout the year for tax purposes was the less exciting, administrative part of his way of giving. When Jamal began funneling all his charitable giving through a donor-advised fund, he was grateful for how it eased his administrative burden. HighGround provides him with one receipt annually that lists all his tax-deductible contributions to his DAF that year. Jamal can focus simply on making his grant recommendations as often and to as many organizations as he wants.
In addition to providing the annual tax receipt, HighGround also performs due diligence on donors’ selected charities for them, processes grants, and mails grant checks to the receiving organizations. If you would benefit from the administrative relief that is provided by streamlining your giving through this vehicle, a DAF might be right for you.