We often discuss gifting and charitable giving with our clients—a topic that is both positive and rewarding, yet sometimes challenging. Given that it frequently makes its way onto my whiteboard (the inspiration behind our “newsletter” name), I thought it might be worth exploring in this format. Specifically, I want to highlight one excellent option for allocating and distributing funds for charitable impact: the Donor-Advised Fund (DAF).
A Donor-Advised Fund is a charitable giving vehicle that allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. These funds are typically managed by public charities, such as community foundations or financial institutions like Schwab, which handle the administrative work of managing the fund and distributing grants to qualified nonprofits.
How It Works:
- Contribution: You contribute cash, securities, or other assets to a DAF at Schwab.
- Tax Deduction: You receive an immediate tax deduction for the contribution.
- Investment Growth: The DAF’s assets can be invested, potentially growing tax-free.
- Grant Recommendations: You can recommend grants to qualified charities over time.
Benefits of Donor-Advised Funds
- Immediate Tax Deduction: Receive a tax deduction for the year you contribute, regardless of when grants are made to charities.
- Tax-Free Investment Growth: Contributions can be invested and grow tax-free, potentially allowing you to give more over time.
- Flexible Timing: Separate the timing of the tax deduction from actual charitable giving, which is useful for donors wanting to contribute over time while maximizing immediate tax benefits.
- Streamlined Administration: Schwab handles record-keeping, compliance, and grant distribution, making DAFs convenient for donors.
- Anonymity Option: Choose to make grants anonymously for added privacy.
Potential Drawbacks of Donor-Advised Funds
- Limited Direct Control: Technically, Schwab controls the investments in the DAF. While donors can make recommendations, the organization has final say (though recommendations are rarely denied).
- Management Fees: DAFs charge small management fees that can slightly reduce funds available for giving.
- Grant Restrictions: Grants can only go to qualified public charities, limiting support to certain types of organizations.
- Potential Delayed Giving: Without required disbursement timelines, funds might remain in the account without benefiting charities.
When a Donor-Advised Fund Makes Sense
A DAF is often ideal for clients who:
- Seek an efficient way to give while maintaining investment control and gifting flexibility
- Have a high-income year and want to maximize charitable deductions
- Wish to make significant donations over time with long-term growth potential
- Desire a streamlined approach to charitable giving without establishing a private foundation
Callan and I are always happy to dive deeper into this topic. For now, we hope this introduction to Donor-Advised Funds proves valuable—perhaps even sparking a conversation around the Thanksgiving table as you pass the gravy and reflect on gratitude.
