Donor-advised funds: Helping you help others

Supporting the causes you value can be incredibly satisfying and rewarding. Using your dollars to make a meaningful impact can improve your community and the world. However, depending on your charitable donation, sometimes it can come with complicated tax rules and administrative hurdles.

You may want to consider setting up a donor-advised fund as part of your giving strategy. It can help maximize your impact and potentially provide tax benefits. And it has other features you may find helpful.

A donor-advised fund (DAF) is an account designed for charitable giving and may help simplify your giving while providing flexibility in supporting the charities and causes closest to your heart.

To create your personalized fund, you can make a gift of cash, stocks, real estate, private business interests and more. Every contribution to your fund could be eligible for a charitable tax deduction in the year the gift is made.

Once your donor-advised fund is created and funded, you can begin recommending grants to the charities of your choosing, and even designate specific uses for your support. Over time, your fund may grow through investment options and sound stewardship of your gifts. This can mean more money to your favorite charities.

As the donor, you advise the fund and recommend where the money goes and when grants get paid out. Those distributions can happen when you choose. You can recommend grants to IRS-qualified charities. Those organizations might include animal shelters, your alma mater or religious organizations. Ultimately, you have control over how much and where you give, and the DAF helps make that process easier.

While you can give directly to tax-qualified charities, a DAF may enhance your overall experience, allow you to give more, and enable you to make a larger difference for the communities and causes close to your heart. Here are three related advantages.

DAFs may allow you to give a broad range of assets. You can fund an account with cash and appreciated securities, but you also can use other assets to fund your giving. For instance, you might want to use real estate or other personal property, and a DAF can often accommodate those assets and convert them to liquid funds for giving.

Once the assets are in your DAF, you can choose how to invest the funds. You might pursue long-term growth or take a more conservative approach. It's completely up to your discretion.

Using a DAF may enable tax strategies that were previously out of reach. For instance, you might contribute to your DAF a substantial amount in one year and be eligible for charitable deduction in the year it was given. Then, you can spread out grants from the fund over multiple years if you choose. As a result, you might improve your chances of qualifying for deductions and simplify your tax returns, if this is important to you.

Of course, you must itemize your return to get substantial deductions for charitable giving, but a DAF might make that easier. Since recent law changes, many people don't itemize deductions, opting for a standard deduction instead. For itemizing to make sense, you often need sizable deductions, which might include charitable donations to qualifying organizations. If your donations aren't large enough to exceed a standard deduction, you might not reap the tax benefits. However, if you "bundle" several years' worth of donations into one tax year, you can get a tax benefit and spread out the grants over subsequent years.

The amount of your deduction depends on several factors, including the type of asset you donate and how long you owned it. It's crucial to work with a financial advisor and your tax professional to calculate the right amount and develop a sound strategy. By doing so, you can maximize the tax benefits and the assets left over for giving.

In addition to helping with deductions, a DAF may help your tax situation in other ways. For instance, if you own investments that have gained value, you might face capital gains taxes if you sell them. It may seem intuitive to sell assets, pay taxes and donate whatever is left. But you can give those investments to your DAF instead. When doing so, you can potentially get a tax deduction instead of paying capital gains taxes, helping you make a bigger impact on the causes you value.

Finally, any growth inside of the DAF is tax-free. Because of that, you aren't taxed on earnings each year (or when you sell assets in the fund), so you can use those funds for additional giving.

Instead of tracking receipts from multiple charities in a given year, you (and your tax preparer) will have one receipt from your DAF detailing all of your contributions and distributions from your fund.

Your DAF provider also can help with due diligence. That way, you can be confident your money supports qualified charities, and you might even get updates on how the funds were used.

When compared to a private foundation, a DAF is substantially easier to manage. You can establish a fund almost instantly, potentially helping you get a tax deduction before the end of a calendar year. Plus, a DAF reduces the legal and reporting hurdles. For instance, you don't need a board of directors, nor do you need to conduct regular meetings (with meeting minutes) or file returns for your fund. Instead, the DAF provider takes on those responsibilities. Your main task is to select causes you value and recommend grants to those charities.

As a bonus, giving through DAFs might offer a bigger tax deduction than donations to a private foundation. Again, discussing the specifics with your financial advisor and tax professional is crucial, but DAFs might offer an attractive pairing of simplicity and tax optimization.

A DAF is an excellent tool for leaving a meaningful legacy. You can both add assets during your life and leave assets to the fund upon your death. For example, you might pass assets to the fund through your will or trust, or you could name the fund as a beneficiary of a life insurance policy.

If you'd like, you can choose to recommend anonymous grants. Whatever route you choose, your generosity can greatly impact the causes you value—during and after your life.

After your death, there are several ways to handle the assets:

• If you name a successor to your DAF, that person can continue adding to the fund, recommending grants and carrying on your legacy.
• You can request that the fund make regular donations on an ongoing basis until the funds are depleted.
• Or, you might ask that the fund distribute any remaining assets in a lump sum to one or more charities of your choice.

While a DAF can help manage your tax efficiency and support the causes you value, it's important to consider a few factors before you set one up.

For starters, review the tax aspects with a financial advisor and tax professional before you make any decisions. Discuss your values and giving intentions and which assets you might donate. They can run some projections on how your tax situation might change.

Also, know that once you make a contribution to a DAF, that money is earmarked for charitable purposes. Your contributions are irrevocable transfers, and you only can use the funds to provide grants to IRS-qualified charities.

DAFs are designed for giving to IRS-qualified charities. While you can choose from many worthy causes, the IRS prohibits using DAF funds to provide grants to:

• Individuals in need (crowdfunding, for example)
• Private foundations
• Pay an individual or organization to manage the fund
• Groups that do great work in your community—but aren't qualifying charitable organizations

Your DAF provider can help you understand IRS-qualified charities and how to make the most of your giving through your fund. Be aware that depending on your fund balance and your DAF provider's policies, there may be fees associated with your fund for the services you receive (like the administrative and record-keeping benefits) from a DAF sponsor. Fees vary, and can appear in different ways, such as minimums to a percentage of the funds value (1% or less, for example), and the amount often declines as assets increase. Minimum fees may apply.

As you explore ways to give back, it's worth investigating DAFs as part of your financial strategy. Those accounts can help you support the causes you value—potentially maximizing tax benefits, simplifying administration of your charitable giving and making it easy to donate during and after your life.

Speak with a financial advisor to learn more about DAFs and how they might work with your finances. A financial advisor can look at the big picture with you and discuss the pros and cons of various options as they relate to your unique situation. With a well-designed strategy in place, you can make a difference in the areas that matter most to you.