Feeling Charitable? Use Donor Advised Funds
If you are looking for a tax-efficient way to make gifts to charities you support, consider using Donor Advised Funds (DAFs). DAFs provide a low-cost and simple vehicle for making tax-deductible contributions of assets. Donors can then recommend grants to charitable organization from their DAF account over time. There is no legal minimum payout requirement, unlike private foundations which must give away 5% of their annual assets.
Low Cost & Simplicity
Donor Advised Funds are not burdened with high costs and public disclosure requirements. DAFs are offered by many major financial services institutions such as Fidelity, Vanguard, and Schwab. Each custodian may have a different minimum initial contribution amount and minimum grant recommendation amount. The administrative fees are generally comparable among these institutions. Making grants can be done simply by logging into the DAF’s web page or making a call.
Donors who make gift contributions to DAFs can deduct the gift value in the same tax year even if they did not make the grant recommendations within the same year. Additionally, donors who donate appreciated investment assets directly to DAF accounts will avoid payment of capital gain taxes on their sale. This allows you to pay lower taxes and also allows the charities you support to receive the most money possible. Read this article for some important information to keep in mind when donating various types of appreciated investments.
Mr. Smith decides to set up a Donor Advised Fund to make his annual $10,000 charitable gift to his church. Instead of writing a check, he transfers the highly appreciated shares of Apple stock in his brokerage account to his DAF account in the amount of $20,000. When the transfer is completed, he receives an immediate tax deduction for the $20,000 market value of the stocks; the Apple shares are sold in the DAF account incurring no capital gain. He directs DAF to make the $10,000 grant to his church for his current year donation, and keep the other $10,000 in the DAF account for next year’s donation.
Mr. Smith then uses $20,000 cash from his checking account (that he would have otherwise used to make the charitable gift) to purchase new shares of Apple stock in his brokerage account. He now still owns the same stock that he had bought many years ago, with no embedded capital gain, received tax deduction of $20,000, and satisfied his charitable goal. Charitable giving can be this simple and tax-efficient!