Understanding the Financial Benefits of Donor-Advised Funds

Donor-Advised Funds (DAFs) are becoming increasingly popular for families that want  to impact their communities and legacies while realizing significant tax benefits for  themselves. These funds are a flexible and efficient method for donating money to non profits while they live.  

We will explore the primary characteristics of donor-advised funds and some advanced  planning strategies, as well as discuss the advantages of how they can be a strategic  part of your philanthropic and financial planning. 

As Washington D.C. CFP® professionals, we specialize in helping successful  individuals develop comprehensive charitable giving strategies that include donor advised funds.  

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What is a Donor-Advised Fund?  

A Donor-Advised Fund (DAF) is a philanthropic vehicle that allows you to make  charitable contributions to a fund that can be managed by a sponsoring organization.  

Here’s a description of how DAFs work: 

1. You contribute cash, stocks, or other assets to a DAF and receive an immediate  tax deduction for the year you donate. 
2. Your contribution is placed into a fund where it can be invested and grow tax free, enhancing the potential impact of your donations over time. 
3. As the donor, you can recommend grants from the fund to qualified charities over  time. Although the sponsoring organization has the final say, they follow your gift  recommendations. 

Following are examples of Donor-Advised Funds 

• American Endowment Foundation  
• The US Charitable Gift Trust 
• Fidelity Charitable: One of the largest sponsoring organizations, Fidelity  Charitable allows donors to open a DAF with multiple investment options. 

Considerations Before Setting Up a Donor-Advised Fund  

While DAFs offer numerous financial and charitable benefits, they are not suitable for  everyone. It’s crucial to understand your charitable goals and financial situation.  

Here are a few considerations: 

• Depending on the sponsoring organization, most DAFs have a minimum initial  contribution requirement, ranging from a few thousand dollars to much higher  minimum amounts.
• Some funds have specific rules about the frequency and minimum sizes of grants  you can recommend. Make sure these terms align with your intentions for  charitable giving. 
• Understand the fees associated with managing the fund. These can include  administrative and investment fees, which may vary by sponsoring organization. 
• DAFs can be set up to continue your charitable legacy beyond your lifetime.  Discuss with a Washington, D.C. financial advisor how to include the fund in your  estate planning. 

Advanced Donor-Advised Fund Strategies  

There are several ways to leverage the power of a DAF. Following are a few ways to  maximize the impact of charitable contributions while you and your family enjoy the  financial benefits: 

1. You can ‘bunch’ multiple years of donations into one to maximize tax deductions.  This can help you surpass the standard deduction threshold and claim a larger  itemized deduction in a specific tax year. 
2. You can appoint successors to your DAF accounts, making them a tool for family  philanthropy and legacy planning. This can also engage younger generations in  your charitable giving goals. 
3. DAFs allow the funds to be invested while in the account, potentially increasing  the amount available for future donations. Depending on the DAF sponsor’s  offerings, you can choose various investment options. 
4. DAFs can accept more than cash and publicly traded stocks, and may include  real estate, privately held business interests, collectibles, and cryptocurrency.  This can be particularly tax-efficient for assets that have large amounts of  appreciation. 
5. Some people use their DAFs to sponsor specific projects or initiatives, which can  include multi-year commitments. This can help charities plan for long-term  projects with greater financial certainty.
6. You can make anonymous donations through your DAF, which can be an  appealing option if you prefer privacy or wish to avoid excessive numbers of  solicitations. 
7. DAFs can be combined with other financial tools, such as charitable trusts, for a  more productive tax and estate planning strategy. This can provide additional  benefits, like income streams or specific bequest strategies. 

Benefits of Using Donor-Advised Funds 

1. Tax Advantages 

One of the most attractive features of a Donor-Advised Fund is its tax benefit. You are  eligible for an immediate tax deduction when you contribute assets, such as cash,  stocks, and other assets, to a DAF.  

If you donate appreciated securities, you can deduct the total market value of the assets  up to 60% of your adjusted gross income (AGI), compared to the 30% AGI limit when  donating directly to a charity. This can significantly reduce your taxable income. 

If you donate securities or other assets that have increased in value, you typically do not  have to pay capital gains tax on the appreciation. This means you can donate more to  charity than if you sold the assets first and then donated the proceeds after paying all  the applicable taxes. 

Contributions to a DAF can assist in reducing the size of your estate, potentially  lowering taxes if your estate valuation exceeds the federal estate tax exemption. The  federal estate tax exemption limit in 2024 is $12.92 million per individual. You can leave  up to $12.92 million to heirs without your estate being subject to federal tax. Each  spouse has this exemption for married couples, effectively doubling it to $25.84 million,  provided the right estate planning techniques are used to claim both exemptions.  These federal estate tax exemption limits sunset at the end of 2025. 

Once assets are in a DAF, they can be invested and grow tax-free. The increased value  of these investments can then be granted to charities over time, maximizing the impact  of your initial donation. 

2. Flexibility in Giving 

Donor-Advised Funds allow you to contribute to the fund as frequently as you like and  recommend grants to your favorite charities at your convenience. This flexibility ensures 

you can respond to the needs of charities as they arise or strategize your donations to  align with specific goals or frequency of donations. 

3. Simplified Record Keeping 

DAFs simplify tracking your charitable donations by consolidating your contributions into  one account. This is particularly advantageous during tax season or when you must  review your philanthropic strategy annually. 

Brown|Miller Charitable Giving Solutions  

At Brown|Miller Wealth Management, our Washington, DC, financial advisors specialize  in building charitable giving solutions, including donor-advised fund strategies for  successful individuals and their families. 

We use a three-step approach called Discover-Design-Deliver to thoroughly understand  your financial situation, regardless of your life stage. This detailed process helps us  develop a flexible financial plan that adapts to your financial journey. Thoughtful financial planning can significantly boost your well-being and that of your family  members. 

Our services are designed to support you, your family, current and future generations,  and the broader community. This can include enhancing educational opportunities for  the young, shaping future leaders, and ensuring their life choices align with your family’s  principles and beliefs. 

Interested in learning more about how we can help with charitable giving solutions?  Let’s talk.

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