Donor-advised funds: Helping you help others

Generosity is rarely just about the dollars. It's about the people and causes that matter most to you, and the legacy you want to build around them. But even the most meaningful giving can get tangled in complicated tax rules and administrative hurdles that can make you hesitate before you act.

If you've run into these challenges, the last thing you want to do is curtail your giving. Instead, you may want to consider setting up a donor-advised fund as part of your giving strategy. It can help maximize your impact, potentially provide tax benefits and simplify your charitable giving.

A donor-advised fund (DAF) is a charitable giving account sponsored by charitable organization, like Thrivent Charitable^®, that lets you support the causes closest to your heart. When you contribute to a DAF, you're making an irrevocable gift to that sponsoring organization, which then holds and manages the fund on your behalf while you recommend how and when the money is granted.

A DAF sits between giving directly to charities and setting up a private foundation. It offers more structure and potential tax-efficiency than one-off donations, without the cost and complexity of running your own foundation.

A donor-advised fund works in three steps: you contribute assets to open the fund, those assets have the potential to grow through investment, and you recommend grants to the charities you want to support, on whatever timeline works for you.

Here's how each step works in practice:

1. Contribute to your fund. Open a fund by making a gift of cash, publicly traded securities, real estate, private business interests or other eligible assets. Every contribution to your fund is eligible for a charitable tax deduction in the year the gift is made.
2. Allow your charitable assets to grow. Once your fund is established, you can choose from available investment options. Over time, your charitable assets may grow through investment returns, potentially increasing the amount available to support the causes you care about.
3. Recommend grants to charities you support. 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, including animal shelters, religious organizations or even your alma mater. Ultimately, you stay in control, deciding how much, when and where your generosity goes. The DAF just clears the road.

A donor-advised fund offers three main advantages over giving directly to charity: flexibility in the types of assets you can give, simpler recordkeeping since all your giving runs through one account and potential tax benefits. Here's how each works:

Here are three specific advantages of DAFs:

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 often can 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 to increase your future giving capacity, or take a more conservative approach if you plan to grant sooner. Either way, the strategy is built around your generosity, not just your portfolio.

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

Your DAF provider also can help with due diligence, so you can give with confidence that your money is reaching organizations doing what they say they're doing. Beyond the convenience, it means your generosity reaches the people and causes you meant to help.

Using a DAF may open the door to tax strategies that aren't always practical with direct charitable giving. For example, you can contribute a larger amount to your DAF in one year and, if you're eligible, claim a charitable tax deduction that year. Then, you can recommend grants to your favorite charities over the course of multiple years instead of making all your donations at once.

A DAF also may help you avoid capital gains tax by donating appreciated investments instead of selling them first. And because all your charitable giving runs through one account, tax time takes less of your attention, so more of it can go toward deciding who your giving benefits.

In addition to helping with charitable deductions, a DAF also may offer other tax advantages. For example, if you own investments that have gained value, you might owe capital gains tax if you sell them. It may seem intuitive to sell those assets, pay the taxes and donate whatever is left. But you may be able to donate the investments directly to your DAF instead. Doing so could help you avoid capital gains tax while also qualifying for a charitable tax deduction, putting more of your money to work.

That's more than a tax advantage, it's more support, sooner, for the causes that you care about. The tax benefits available to you will depend on your unique financial situation, so work with your financial advisor and tax professional to develop a giving strategy that aligns with your goals.

Both DAFs and private foundations can help you support the causes you care about, but they differ in how they're managed, the level of control they offer and their tax treatment.

A DAF may provide a simpler way to organize charitable giving while maintaining flexibility. A private foundation may be a better fit if you want more direct control and are prepared to take on additional administrative responsibilities.

Here’s a quick comparison of the two:

Comparing the two, the right choice for you depends on your financial goals, the level of control you want and how much administration you're willing to take on.

Your generosity doesn't have to end when your life does. A donor-advised fund lets you build a legacy that continues supporting the causes you care about long after you're gone. 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.
• You can ask that the fund distribute any remaining assets in a lump sum to one or more charities of your choice.

Before opening a DAF, there are four things worth understanding: the tax details can get complex, your contributions become irrevocable, not every charity qualifies for a DAF grant, and most providers charge fees. Here's what each of those means in practice:

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.

Once you contribute to a DAF, that money is earmarked for charitable purposes. Your contributions are irrevocable transfers, and you can only 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, DAF funds generally can’t be used to:

• Provide grants directly to individuals, such as through crowdfunding campaigns
• Support organizations that aren’t IRS-qualified public charities
• Pay an individual or organization to manage the fund
• Make grants to private foundations

Your DAF provider can help you identify IRS-qualified charities and manage the administrative and recordkeeping responsibilities associated with your fund. In exchange for those services, your DAF may be subject to fees.

Fee structures vary by provider. Some charge a minimum annual fee, while others charge a percentage of your fund's assets (often 1% or less). In some cases, fees decrease as your account balance grows.

A QCD may offer another tax-smart way to give

If you're age 70½ or older, a qualified charitable distribution (QCD) lets you donate eligible IRA assets directly to a qualified charity and may help lower your AGI. While a QCD can't be contributed to a DAF, it may be another tax-efficient way to give that can fit into your overall giving strategy.


Rules, pros & cons of QCDs

As you explore ways to give back, consider DAF accounts as part of your financial strategy. They 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.

Thrivent Charitable^® was built specifically to help people give with intention, not just efficiently. Because it works hand-in-hand with Thrivent, your DAF strategy can be part of a bigger conversation with your financial advisor about your whole financial picture, not a separate account you manage on the side. Speak with a Thrivent financial advisor to learn more about DAFs and how they can work for you.