As a firm dedicated to financial well-being and wealth management, we strive to present opportunities that align with your values and financial objectives. Let’s explore a tool that enables both charitable giving and tax efficiency: Donor Advised Funds (DAFs).
What is a Donor Advised Fund?
A Donor Advised Fund is a dedicated charitable investment account for the sole purpose of supporting charitable organizations you care about. Donors begin by establishing the DAF account at a public charity, like Schwab Charitable. The donor can then contribute cash or securities to the fund. An immediate tax benefit, subject to IRS limitations, is generally available in the year of the donation. Contributions made to the DAF can then be invested to grow tax-free within the DAF over time. Finally, at your discretion, you can recommend grants from the Donor Advised Fund to your preferred 501(c)(3) charity of your choosing.
Donor Advised Funds are the fastest-growing charitable giving vehicle in the United States1, primarily due to their ease of use and advantageous tax benefits. You can think of it as a charitable checkbook. Once established, simply log into your online Schwab portal and request a grant out of the account to your preferred charity with the click of a button.
Gifting Securities: A Double Benefit
In addition to cash, one of the most attractive features of a DAF is the ability to donate long-term held securities, including stocks, bonds, and mutual funds. This is where tax benefits truly shine for the strategic donor.
Donating appreciated securities to the DAF bypasses the capital gains tax that would otherwise be due if these securities were sold. Plus, you can claim the current market value, not the original cost basis, as a charitable deduction.
The key here, though, is to gift long-term held securities, those held for over one year. The IRS treats long-term and short-term capital gains differently, with long-term gains generally taxed at a lower rate. By donating securities held long-term, you maximize your tax benefits: avoiding capital gains tax and also receiving a deduction for the full fair market value. For short-term holdings, your deduction is limited to the lesser of fair market value or your cost basis, often diluting the tax benefit.
Here’s a scenario: Imagine you purchased a stock years ago for $10,000, which is now worth $30,000. By gifting this stock through a DAF, not only do you eliminate the capital gains tax on the $20,000 appreciation, but you also can claim the full $30,000 as a charitable deduction for tax purposes (generally). This is truly a win-win.
Benefits of Donor Advised Funds
The benefits of DAFs extend beyond tax advantages. Here are a few more reasons why they’re a popular charitable giving tool:
By considering a Donor Advised Fund, you’re taking an important step towards merging your financial objectives with your desire to make a difference.
If you’re interested in exploring the potential of Donor Advised Funds further, we’re here to help. Our dedicated team can provide guidance on establishing a DAF and offer advice on tax-efficient gifting strategies. Reach out to us today to continue this rewarding conversation.
*It’s important to note that tax laws are complex and change frequently, so the information presented may not be current after June 2023. Prior to any contribution to a donor advised fund, it’s important to discuss your personal situation with your tax professional. The IRS imposes income limitations meaning that your total deduction for all charitable contributions in any tax year cannot exceed a certain percentage of your adjusted gross income.
We believe that to properly manage your assets, we need to have a complete picture of who you are and what you hope to achieve.