Optimize your charitable giving with donor-advised funds

Author: Stephen Kump, CEO of Charityvest

Donor-advised funds (DAFs) are increasingly the tool Americans are using to give to charity. The number of donor-advised funds has grown substantially, and over 20% of all charitable dollars now go through DAFs today.

The reason they are growing in popularity is because they enable you to maximize the tax-advantages of your giving today, to support your desired charities at the highest impact moments over time and reduce the administration required.

What exactly is a DAF?

Donor-advised funds are tax-deductible financial accounts that facilitate charitable donations on behalf of "donor advisors." As soon as money is added to the DAF, it’s tax deductible. Funds can be invested and grown in that account tax-free. Whenever the donor chooses, they can support any qualified charity.

A sponsoring charitable organization owns these accounts (that's what makes them tax-deductible); however, the accounts are held in the name of a donor. The donor has the ability to "recommend" how the money is distributed to charities from the account. Sponsoring organizations carry out the donor's recommendations as long as it is compliant with their policies. It's like having a personal charitable foundation, but with none of the overhead.

Why leverage a DAF?

If you want to be more tax-efficient and purposeful with your charitable giving, it may be time for you to consider a donor-advised fund. Here are some reasons why:

1. Get tax-deductions now and decide which charities to support later. Because of the structure, donors have the flexibility to claim tax deductions as they place funds in a DAF. This flexibility can allow donors to normalize giving across tax years as they have changes in income, or allow donors to maximize deductions through deduction "bunching".
2. Grow your giving power with investments. The balance in your DAF can be invested, allowing it to potentially grow tax-free. This means more money available for you to give in the future.
3. Avoid capital gains tax without administrative overhead. In addition to cash, DAFs allow you to donate multiple types of assets, such as cryptocurrency, stocks, and real estate. If you’ve held these assets for over one year and they have appreciated in value, you could avoid capital gains tax and optimize your deductions.
4. Consolidate your tax statements. With a DAF, there's only one annual tax receipt for all giving activity. This makes it simple to track and report your deductions on your tax filing.
5. Automate your giving from one place. If you give money on a regular frequency, you can set up automatic money flows into your DAF account from your bank or credit card, and out to charities for free. Some may even allow you to schedule future one-time giving.
6. Create a legacy of generosity. DAFs can help you plan for the future, as well as for future generations. Depending on the DAF sponsor, you can set up a family or cause-driven community fund, establish a legacy gift to your favorite charity and enable beneficiaries on your account to uphold your personal charitable mission without complicating your estate plan.

Donor-advised funds are an excellent way to increase the impact of your charitable giving. By leveraging the flexibility and tax-efficiency of DAFs, you can make a meaningful difference now and well into the future.

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Author: Stephen Kump

Stephen is the CEO, idea guy, and chief promoter of generosity at Charityvest. He is a former philanthropic advisor, a former consultant with Bain & Company, and a US Army Veteran. In terms of relationships and experiences, he considers himself the world's richest person.

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