Charitable Gifts: Maximizing the Power of Donor-Advised Funds

Last update on: Jun 23 2020

Donor-advised funds steadily increased in popularity over the years, but their use soared after the Tax Cuts and Jobs Act of 2017. Their popularity is likely to continue increasing.

Also known as a charitable gift fund, the donor-advised fund (DAF) took off after the early 1990s. Fidelity Charitable is believed to have set up the first national DAF in 1991. Local and regional DAFs existed for many years before that.

The DAF gives everyone else many of the tax and charitable giving advantages previously reserved only for those who were wealthy enough to set up private foundations. Now, planned charitable giving is low-cost, national and convenient.

A DAF is created or sponsored by a charity. Most large national DAFs are related to charitable arms of major brokerage or mutual fund firms, with the largest organized by Fidelity, Schwab and Vanguard. The taxpayer opens an account with the DAF and makes a contribution. The contribution qualifies for an immediate charitable contribution income tax deduction. Though you have an account in your name, it isn’t money you can get back. The money can only be donated to qualified charities. Donations can be made whenever it suits the donor.

Unlike a private foundation, there’s no minimum annual giving requirement. DAFs also are private; donations aren’t publicly reported. Money waiting in the account is invested according to the donor’s choices from among investment options designated by the fund. A big advantage of the DAF is you can take one large charitable deduction when it makes sense for you. You might want to make a large gift in a year when you have unusually high income, say, from a bonus or from selling an asset with a large capital gain.

The DAF also can be used as a tax-efficient way to dispose of an asset in which you have a large gain. Instead of selling it and incurring the long-term capital gains taxes, you can donate all or part of the investment. You receive a charitable contribution deduction equal to the current fair market value of the asset. You don’t pay taxes on the capital gain.

The DAF is more attractive now because of the changes made by the Tax Cuts and Jobs Act. You take a charitable contribution deduction only when you itemize expenses on Schedule A of your Form 1040. Far fewer people itemize expenses now because of the tax law changes.

One change is that the standard deduction was doubled. You itemize expenses only when their total exceeds the standard deduction. With the standard deduction doubled, fewer people reach the threshold for itemizing expenses, so they receive no extra tax benefit from charitable giving.

Another change is that several itemized expenses were reduced or eliminated. State and local taxes are deductible only to a maximum of $10,000 annually.

Miscellaneous itemized expenses were eliminated. Again, those reductions mean far fewer people itemize expenses. That’s where the DAF can fill a gap. Instead of making charitable contributions each year, you can bunch several years of contributions in one year by donating cash or property to a DAF.

Give enough so that you’ll be able to itemize expenses that year and receive a tax benefit from the contribution. Once the contribution is in the DAF, you can make regular donations over time from the DAF to charities as you did in the past.

Or you can let the investment returns accumulate and give larger contributions in the future. You receive the deduction when you donate to the DAF, even if you don’t have the DAF give to charity until a future year. Deductions of cash contributions generally are limited to 60% of your adjusted gross income for the year. The deduction limit for contributions of long-term capital gains property usually is 30% of adjusted gross income (AGI). Don’t forget to consider the effects of the alternative minimum tax when planning how much to give.

Many DAFs make giving easy by giving you a checkbook. When you’re ready to make a gift, simply write a check as you do when giving from your personal checking account. You can make it appear you have a private foundation through the name printed on the checks, such as “Max Profits Charitable Trust.” Some DAFs let you designate gifts through websites.

Technically, these are “donor-advised” funds, so you’re only making a recommendation to the DAF. But DAFs usually make the recommended contributions as long as they are to IRS-approved charities.

Most donor-advised funds allow you to start with $5,000. You can choose one of the DAFs sponsored by financial services companies or seek out a DAF sponsored by a local charity, coalition of charities, national charity, or university. You can learn about many local and regional options here.

Be aware that DAFs sponsored by a charity or focused on a region usually require a minimum percentage of the contributions be made to the associated charities.

Of course, compare fees and expenses. They won’t reduce your charitable deduction, but they will reduce the amount of money that’s available to give.

Also, examine any giving limits. Some funds limit the number of individual contributions you can make or checks you can write each year without incurring additional expenses. There might be a minimum individual donation amount, and a minimum account balance might have to be maintained. The financial services companies generally accept contributions to the account only in cash and securities. Some DAFs sponsored by charities, however, accept many kinds of assets, including real estate, art and limited partnerships.

You can make the DAF a family activity. Family members can gather periodically to discuss which charities should receive gifts. Or you can give each child discretion over a DAF account or an amount of the account.

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