Donor Advised Funds bring tax efficiency, flexibility to year-end giving
An easy way to take a more thoughtful approach to your charitable donations
Donor Advised Funds (DAFs) are charitable gift vehicles, sponsored by public charities that accept tax-deductible donations and invest them in a donor account until the donor requests that grants be made from the account to other IRS qualified charities.
An increasing number of people are using Donor Advised Fund accounts (DAFs) in their giving plans because a DAF:
- is easy to establish, flexible, and private
- has immediate tax benefits
- gives donors plenty of time to decide which charities they want to support and how much they want to give them
Investors who own highly appreciated stocks can also use DAFs as a temporary solution for donating those securities—without having to pay taxes on any gains—while they decide which individual charities to fund later on.
Here’s how it works:
1. You open a DAF Donor Account at an investment firm or commercial gift fund. Connect with your Boston Private Wealth Advisor to learn about the DAF solutions available to you.
2. You then contribute cash, stocks, or other assets to your account at any time and receive a tax deduction for all the contributions you make to the DAF during that tax year.
If you donate appreciated stocks, you can deduct their full market value and eliminate the need to pay taxes on any long-term gains.
3. While in the account, your money is invested in your choice of pooled investment vehicles, so it has the potential to grow for the future. You can allocate each gift contribution to any of the funds available to suit your time frame and investment outlook.
4. Later, online or on the phone, you can make gifts or grant funds from the DAF to IRS-approved public charities at any time, over an extended period of months or years.
5. All transactions and required documentation for IRS reporting are handled by the fund sponsor and you receive tax-ready confirmations of your contributions, grants, and quarterly investment statements for the account.
Adding time and flexibility to make giving more strategic
The ability to grant money at any time from the DAF to the charities you select means you and your advisors can be more strategic and deliberate about your giving decisions. Instead of worrying about meeting a particular deadline for deciding how much money or other assets to give to individual charities, you can:
- Make single or multiple contributions of assets to the DAF at any time during the year.
- Get a tax deduction for the year in which your contributions are made.
- Make individual grants any time in the future to any number of approved charities you choose.
Those benefits make DAFs a good fit for a variety of charitable giving situations. For example:
A woman who was selling her business and wanted to give 10% of the proceeds to charity opened a DAF to relieve the pressure of having to select the charities and amounts she wanted to give at a very busy time. The DAF gave her an immediate tax deduction for her contribution in the year of the sale and she had plenty of time later to plan and implement her charitable giving strategy.
An investor with two very concentrated, highly appreciated stock positions with a very low basis funded a DAF each year with a portion of the stock he was trying to remove from his portfolio. As a result, he was able take a tax-deduction for his contributions each year and remove the assets from his estate without having to pay any capital gains taxes on the stock’s appreciation.
Although a DAF can be an attractive giving solution, it’s also important to remember that:
You will pay fees for investment management and account administration. Your contributions are considered irrevocable gifts, so you no longer have direct control over them. It is important to note that any future investment appreciation in the DAF’s funds won’t result in additional tax benefits for you, although they can increase the amount of money available for granting gifts.
DAFs vs. private foundations and ad hoc gifts
A Donor Advised Fund can serve as a more private and cost effective alternative to establishing a private foundation, which involves the time and expense of hiring a lawyer, completing paperwork, submitting regular disclosures, and taking on a significant number of administrative duties.
DAFs also have advantages over ad hoc gifts because:
- grants can be made quickly and easily on the phone or online
- you will get regular, consolidated reports on all of your giving activity
Boston Private Can Help
If the idea of a charitable giving vehicle that is easy to implement, flexible to use, and offers year-round tax advantages appeals to you, then talk with your Boston Private Advisor about adding a Donor Advised Fund to your investment portfolio.
Your advisor will consider your total financial picture, including your long-term estate and legacy goals, to help you decide if a DAF should be part of your charitable giving strategy.
The opinions expressed and information contained in this article are given in good faith, may be subject to change without notice, and are as of the date issued. The accuracy and completeness of this information is not guaranteed. Since each client’s situation is unique, please review your specific objectives and needs with your advisor and/or tax planning professional.
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The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.