Key Questions: What Is a Donor-Advised Fund, and Should I Create One?

Paul Toft, CFA®, Senior Portfolio Manager, September 2022

<p>Key Questions: What Is a Donor-Advised Fund, and Should I Create One?</p>

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These funds for charitable giving are growing in popularity. Consult your advisor to see if it is right for you.

A donor-advised fund (DAF) is an investment vehicle used solely for charitable giving. You donate to a DAF sponsor, establishing a pool of money from which you can direct charitable contributions to various organizations in the future. Generally, you get an immediate tax deduction for the market value of your gift in the tax year the gift is made, even though the money may be granted to various charities in future years.

These funds have grown steadily in popularity over the past several years with a 20% increase in contributions made in 2020 versus the previous year. There are now over one million donor-advised funds in use.

To make the process simple, donors can partner with their investment advisor, who will connect with a DAF sponsor to set up the fund and make the initial gift. The donors and their advisors can continue to manage the investments after the fund has been established. Some DAF sponsors offer only limited investment options such as pooled funds, but others allow for more complex investments including individual stocks.

 

Total Annual Contributions to Donor-Advised Funds (billions)

Total Annual Contributions to Donor-Advised Funds (billions)

This chart shows the growth in Donor-Advised Funds since 2016

  • 2016 - 25.2 Billion
  • 2017 - 30.8 Billion
  • 2018 - 36.22 Billion
  • 2019 - 39.69 Billion
  • 2020 - 47.85 Billion

Source: National Philanthropic Trust

Source: National Philanthropic Trust

The limitations and constraints on these funds have eased in recent years. It is now much easier to set up this vehicle, which is similar to having your own private foundation, but with fewer complications to create and administer. The DAF sponsor takes care of most of the administrative work, such as making grants to your selected charities as well as handling tax compliance issues.

Thousands of charities are eligible to receive grants from your fund as long as they are IRS Qualified 501(c)(3) public charities. These eligible charities will often include local hospitals or your alma mater, as well as your local food bank or homeless shelter.

Why Not Just Write a Check?

Using a DAF versus writing checks offers several advantages for ease of charitable giving and taxes.

For example, donor-advised funds make the giving of appreciated securities straightforward and simple. Some smaller charities are not set up to easily accept these types of in-kind donations. By donating appreciated securities, you may be able to avoid the capital gains tax created if those securities were liquidated. You may also get a deduction for the full market value if the securities have been held for more than one year.

Some DAF sponsors also accept more complex assets such as real estate, private equity investments, insurance and more esoteric investments such as cryptocurrency. Gifting to your DAF may also be an option for those long- held appreciated investments where you have lost track of the cost basis. It may also be helpful to review and plan for your charitable giving from year to year with easy online access and everything in one place.

You can gain another tax advantage by bundling your gifts every other year in order to get the most savings from itemizing deductions.

The Tax Cuts and Jobs Act of 2017 increased the standard deduction ($25,900 in 2022) for a married couple filing jointly. The increased deduction, combined with the current $10,000 cap on state and local tax deductions means more people may be taking the standard deduction and not getting the added tax benefits of the charitable contributions they previously received when they were itemizing deductions on their tax returns every year.

Having a DAF makes it easier to bundle your charitable contributions in one tax year to get the added tax benefits from itemizing and still have smooth annual giving to your favorite charitable entities.

Costs and Minimums Vary

Different DAF sponsors have varying fee schedules, but in general, you can expect to see an administrative fee of up to 1% from the sponsor for their services. The initial minimum gift required to open a donor-advised fund varies but is often in the range of $10,000 to $25,000. The minimum amount you can direct for grants to your chosen charity is often in the $50 to $250 range, depending on the sponsor. DAF contributions are subject to a 60% adjusted gross income (AGI) limitation for cash gifts (30% for appreciated securities).

Making larger contributions in years when your earnings put you in a higher tax bracket allows you to be more tax efficient in your giving. It also enables you to have funds on hand to continue to make charitable donations in years when earnings are more limited. You can also name successors to your DAF in order to encourage philanthropy in your children. But remember, once you give money to the fund, it is considered a gift and cannot be reversed.

Key Takeaways

In summary, a donor-advised fund offers several advantages for charitable donations by allowing you to:

  • Get an immediate tax deduction for the market value of your gift in the tax year the gift is made.
  • Maximize potential tax benefits by bundling gifts every other year.
  • Donate long-held appreciated securities instead of liquidating them, avoiding capital gains taxes.
  • Contribute a wide range of assets, including stocks, mutual funds and bonds, and even more complex assets such as real estate or cryptocurrency.

Paul Toft Biopic

About Paul Toft

Paul is a Senior Portfolio Manager with Key Private Bank Municipal Investments

He is responsible for portfolio management for corporate municipal accounts, Common Trust Funds and individual municipal portfolios for high-net-worth clients. He has been managing municipal bond portfolios for Key Private Bank clients since 1994 and formerly served as the Managing Director of Municipal Investments at Key Private Bank.

Paul holds a Bachelor of Arts from Wheaton College and an MBA from the J.L. Kellogg Graduate School of Management at Northwestern University. Paul is also a CFA charterholder.

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