Tax-Savvy Giving: Using a Donor-Advised Fund for Your Charitable Giving

Donor-Advised Funds (DAFs) have been around for a while, but lately they are gaining more attention as an effective tax planning tool. Utilizing a DAF could pay off for you come tax time.

So how does a DAF work and what can it do for you?

If you know you want to donate your money to charity, but aren’t sure what cause to give to, a DAF is an excellent choice because you can decide when and where assets get allocated and you can make sizeable donations at one time.

You may also select a DAF to donate appreciated stocks in kind (without selling them first) when your intended recipients can only accept cash/liquid donations.

If a DAF is right for you, how do you differentiate it?

If you decide a DAF would be useful to your cause, the next step is to select an organization to sponsor your contribution. Sponsors typically fall into three types:

  1. Public charities established by financial providers, like Fidelity, Schwab and Vanguard
  2. Independent national organizations, like the Independent Charitable Gift Fund, American Endowment Foundation and National Philanthropic Trust
  3. “Single issue” entities, like religious, educational or emergency aid organizations

Within and among these categories, DAFs are not entirely interchangeable. Whether you’re being guided by a professional advisor or you’re managing the selection process on your own, it’s worth doing some due diligence before you fund a DAF.

Here are some key considerations:

Minimums – Different DAFs have different minimums for opening an account.

Fees – As with any investment account, expect administration fees. Be sure to investigate what they are before funding a DAF.

Acceptable Assets – Most DAFs will let you donate cash as well as stocks. Some may accept other types of assets, such as real estate, private equity or insurance.

Grant-Giving Policies – Some grant-giving policies are more flexible than others. Be sure to do your due diligence and look into what these may be.

Investment Policies –DAF assets are typically invested in the market, so they can grow tax-free over time. But some investments are far more advisable than others for building long-term giving power. If you’re already working with a wealth advisor, it can make good sense to choose a DAF that lets your advisor manage these account assets in a prudent, fiduciary manner.

Transfer and Liquidation Policies – There can be many options surrounding transferring or liquidating your DAF. Make sure to know your options. Some sponsors allow you to name successors, name charitable organizations as beneficiaries, or have a formula for distributing assets to past grant recipients and more.

Selecting an ideal DAF sponsor for your tax planning and charitable intent usually involves a process of elimination. To start, decide which DAF features matter the most to you, and which ones may be deal breakers.

Copper Leaf Financial can help you sort out the DAF options, and meld it into your greater personal and financial goals. Michael L. Thompson, Copper Leaf Financial Wealth Advisor, is a Certified Advisor in Philanthropy (CAP), and he frequently assists clients with their charitable giving including the setup of donor-advised funds.