As the end of the year approaches, supporting charities is a top priority for many. While direct gifts to charities make sense in certain instances, a donor-advised fund (DAF) is a charitable gifting vehicle that has many advantages. Since the Tax Cuts and Jobs Act (TCJA) substantially increased the standard deduction, DAFs have become even more attractive for tax planning. So, how does a donor-advised fund work and why is it more attractive than direct gifting?

 A donor-advised fund is like a charitable investment account with the sole purpose of supporting charities. Below are some common questions that we’ve had in discussions with clients.

When do you receive the tax deduction?

With a donor-advised fund, you receive a tax deduction when you make a contribution to the DAF. Regardless of when the funds are granted to charities, the tax deduction happens as soon as you make a contribution to the DAF. This allows you to use a “bunching” strategy for itemized deductions — funding multiple years of giving in one year to maximize your tax deduction and use the DAF to support charities in future years. In addition to tax benefits, it also simplifies tax recordkeeping since you only need to keep track of the contribution to the DAF and not contributions to multiple charities.

What happens to the assets inside the DAF?

While the contribution is considered a charitable donation, you can still direct the investment of the assets inside the DAF for potential growth. Most DAFs offer many investment options and Fidelity’s Gift Fund has several pre-set allocations available.

What assets can be contributed to a DAF?

While there is a wide range of assets allowed, gifting appreciated securities (stocks, ETFs or mutual funds) enhances the tax advantages. In addition to the deduction for the charitable gift, you also avoid capital gains taxes on any unrealized gains. If you donate cash, you’re generally eligible for an income tax deduction of up to 60 percent of your adjusted gross income (AGI) while appreciated assets are limited to 30 percent of AGI. The simplest way to contribute is through an investment account linked directly to the DAF.

How do you support charities with a DAF?

Once the DAF is funded, it is simple to recommend grants to your favorite charities. For example, the Fidelity Gift Fund allows grants via their website or mobile app. You can only grant to IRS-qualified, 501(c)(3) organizations and cannot recommend grants that provide a personal benefit (such as tickets to a gala or school tuition for a grandchild).

As always, we are here for you. Please email or call if you want to set up a Zoom videoconference meeting or talk by phone.

Mary McCraw, CFP®

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