‘Tis the season for phone calls from charities, Santas at the grocery store, and solicitors at the door. None of these things are inherently bad, but are they the best way to donate your money? Just like anything else with your finances, the more intentional you are, the better.
Is there a magical way for you to maximize your generosity?
Enter Donor-Advised Funds
A lot of financial products are as confusing as hell, so don’t go Googling “donor-advised funds.” Instead, here’s what you need to know about how a donor-advised fund–or DAF for short–work, without all the confusing jargon that normally swirls around anything financial:
- Donate cash or other assets to a DAF sponsoring organization
- Choose your investments. *Hint: We recommend an evidenced-based investment strategy backed by science
- Decide when and how your money gets to the charities of your choice
- Reap the tax benefits and maximize your donation. If invested wisely, your generous gift will build wealth and keep on giving!
The Devil Is In The Details
Okay, not really the devil, but there are some details to mull over before deciding if a DAF fits your charitable giving goals.
You can give anything from cash (of course) to real estate to life insurance and stocks and bonds. Now, once the money is out of your hands, you don’t have legal control over it. BUT, you are the decision-maker when it comes to how the funds are invested and when they are distributed to the charities you recommend.
Notice I said recommend, not choose. According to the legal setup of these accounts, the organization that holds your DAF isn’t required to follow your “advice” but there’s an understanding that they will.
What’s In It For Me?
It might seem like heresy to ask this question when we’re talking about giving to others, but let’s be honest – the tax savings are a big deal. If you donate cash, you typically receive an income tax deduction of up to 50% of your adjusted gross income (AGI). If you donate appreciated securities, you save on the capital gains tax and your deduction will be the full fair-market value, up to 30% of your AGI. If you are currently sitting on some big gains in stocks or mutual funds you own, this is a real win-win that’s difficult to overemphasize.
Another perk is simplicity (you know I always try to sneak my favorite word in somewhere). If you want to give to multiple charities, a DAF allows you to create one account where you can pool your money and dole it out to as many charities as you want, usually with a convenient online platform
Timing is also a draw for some. Say your business has a banner year and you want to donate a big chunk of change, but some of the charities you have your eye on are small and can’t handle such a massive influx of money. A DAF lets you get the tax deduction on the full amount in the year you donate it, but you can choose to divvy out the money to the charities over a longer period of time.
Are you too busy at the moment, especially with the holidays right around the corner? A DAF gives you the time to make a well thought out decision to find and research charities that share your values. DAFs, unlike private foundations, do not require a minimum annual distribution. You won’t be rushed to find organizations to give to in order to get the tax benefit for the current year. In the meantime, your investments will likely grow.
What Do You Think?
Is this the first time you’ve heard of a donor-advised fund? Hopefully your head isn’t spinning. If it is, I’ll get you straight. The year is coming to a close and it’s the prime time to revisit your tax strategy and figure out how you want to end the year on a generous note.
In summary, a donor-advised fund might be a good fit for you if you:
- Want to be involved in your giving choices
- Have multiple charities that you contribute to
- Think it would be cool to see your charitable donations grow and build wealth
- Need more time to figure out who gets your money
- Want to reduce your taxes
Ready to take the plunge and need help implementing a donor-advised fund? Take advantage of my college-throwback “office hours.” Book a time on my online calendar that’s convenient for you and ask me all your DAF questions. Big or small, it doesn’t matter. I promise there will be no quizzes or exams after we chat.
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Pathway founder and principal Greg Brown is a fee only financial advisor with broad financial planning and investing expertise. Greg’s financial advice has been featured in publications like Yahoo Finance, Bankrate, Investopedia (all articles here), Wall Street Journal, and USA Today. He holds a master’s degree from the University of Chicago and a mechanical engineering degree from Michigan State University. Prior to Pathway, Greg was a lead analyst at Morningstar and previously held engineering roles at Dell (including a US Patent).
Also published on Medium.