investing

Giving to Charity? Learn the Ins and Outs of Donor-Advised Funds

These simple, low-cost vehicles tend to be the most efficient and effective ways to engage in charitable giving.

According to the National Philanthropic Trust, Americans gave $358.38 billion to charities in 2014, a 7.1% uptick from the previous year. And with the deadline for deducting charitable contributions approaching on Dec. 31, now is a good time to give back to an organization and/or support a current relief effort.

While there are multiple vehicles available to help support philanthropic giving, we find that donor-advised funds (DAF) tend to be the most efficient and effective giving vehicles. They are simple, low cost, and flexible. They allow donors to maximize the tax benefits of charitable giving while supporting their favorite organizations.

What is a Donor-Advised Fund?

A DAF is simply an account that helps givers manage their charitable contributions. Through an agreement with a DAF provider, a donor creates a specially named account (i.e. “Smith Family Fund”) to which irrevocable contributions are made. The donor receives an immediate tax deduction but is not forced to make any grants. They can work with their adviser to invest and grow the assets and recommend grants to their favorite non-profit, 501(c)(3) organizations at their leisure.

Thinkstock

Why Use a Donor-Advised Fund?

Simplicity. Unlike a private foundation, the donor is not responsible for hiring attorneys and accountants or maintaining a board of directors. The sponsoring organization that holds the fund takes responsibility of all the expensive administration work, including filing annual returns and preparing financial statements.

Tax Efficiency. DAF contributions provide a federal income tax deduction up to 50 percent of adjusted gross income for cash contributions and up to 30 percent of adjusted gross income for appreciated securities. Along with publicly traded securities, DAF holders can also contribute complex assets such as real estate, limited partnership interests, private C- and S-Corp stock, and other privately held assets.

Flexibility. DAF holders receive an immediate tax deduction for their contribution but they are not subject to a legal minimum payout requirement like a private foundation. The flexibility helps donors maximize tax benefits while helping them be more systematic and methodical about their giving.

If you haven’t engaged in charitable giving yet, now is a great time to start. And in doing so, consider the benefits of a DAF—to you and to the future recipients.

Taylor Schulte, CFP® is founder and CEO of Define Financial, a San Diego-based fee-only firm. He is passionate about helping clients accumulate wealth and plan for retirement.

About the Author

Taylor Schulte, CFP

Founder and CEO, Define Financial

Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Dividend Increases: 14 Stocks That Have Doubled Their Payouts
dividend stocks

Dividend Increases: 14 Stocks That Have Doubled Their Payouts

Looking for companies executing substantial dividend increases? These 14 stocks have upped the payout ante by a minimum of 100% this year.
November 26, 2021
Resist the Impulse to Buy These 14 Holiday Gifts
shopping

Resist the Impulse to Buy These 14 Holiday Gifts

Don't let those holiday sale promotions persuade you into buying something now that will be much cheaper later.
November 18, 2021

Recommended

5 Stocks to Sell for 2022
stocks to sell

5 Stocks to Sell for 2022

Sometimes, even good companies make for less-than-desirable investments. These five stocks look like Sells heading into 2022.
December 7, 2021
How Leveraging Alternative Assets and Modern Portfolio Theory Can Help Investors Improve Returns
investing

How Leveraging Alternative Assets and Modern Portfolio Theory Can Help Investors Improve Returns

To help manage risks and possibly boost returns, everyday investors should think about including alt investments in their portfolios. Here’s how to ap…
December 4, 2021
Investing for Income with Jeffrey Kosnett
investing

Investing for Income with Jeffrey Kosnett

Cold, hard cash working from home! No, this isn’t a scam — it’s an investing strategy built on bonds, REITs, preferred stocks and more.
November 30, 2021
Where to Find Yield in 2022
Kiplinger's Investing Outlook

Where to Find Yield in 2022

I am sold on leveraged closed-end debt funds, junk bonds and floating-rate bank loan funds.
November 29, 2021