I tell clients this all the time: Please don’t give to charity for the tax benefits.
You should be giving because you’re committed to using your money for an important cause — whether that’s a big national charity, a local nonprofit, or even your kids’ school.
But if you do give to nonprofits, we want to make sure you’re using the smartest, most tax-advantaged strategies.
For many people, that involves using a tool called a donor-advised fund. A donor-advised fund, or DAF, is a personal charitable giving account. You can open one at brokerages like Fidelity or Schwab, or ask your financial advisor to set one up.
A DAF works as a conduit — you contribute funds to the DAF, then transfer that money to charity over any time period, whether three months or a dozen years. You can also invest the money inside the DAF, rather than keeping it in cash.
For donors, DAFs offer a few advantages over direct gifts.
Timing is one big advantage: By using a DAF, donors can control when they make their gifts.
You receive a tax deduction in the year you give to the DAF — and deductions are more valuable in years of higher income.
So in years of IPOs or other liquidity events, you can make bigger gifts to the DAF to max that tax break. Or you might make a bigger donation ahead of retirement or a professional downshift, when you may be moving into a lower tax bracket.
Then, in later years, you can move the funds from the DAF to the recipient organizations. Note you won’t take the charitable deduction at that point (because that would be double-dipping).
Strategic gift timing can also be useful for people who are near the threshold for itemized deductions. You’d “bunch” a few years’ worth of expected gifts into the DAF, to get over the itemization threshold, then distribute that money over subsequent years, while you take the standard deduction. (You may want to ask your tax advisor for help.)
DAFs also make it easy to donate shares of appreciated stock — opening up another tax advantage.
If you fund your DAF with long-term, low-basis stock, rather than cash, you will get a tax deduction equal to the market value of the shares you contribute. You’ll also avoid paying capital gains taxes on the stock’s appreciation — which you’d wind up paying if you sold the stock and then made a cash gift.
In fact, even if you’re not using a DAF, it’s smart to use appreciated stock for any big gifts. Many large charitable organizations even have fund-raising teams that can help you transfer stock gifts.
But stock gifts can be a headache for smaller nonprofits; if your desired recipient org is smaller, DAFs can make the fund transfers much easier.
As with any investments, be sure to align your DAF investment strategy with your time frame.
If you expect to be distributing gifts over several years, consider a portfolio approach that will let those funds continue to grow with the market. But if you’ll be making gifts over a short time frame, don’t take too much risk inside your DAF.
From both tax and practical perspectives, once you put money in a DAF, you’ve made a permanent gift to charity — there are no take-backs. Make sure you’re giving an amount that is appropriate for your family.
Additionally, the money has to go from the DAF to a qualified 501(c)3 charity — so if your charity is usually via Gofundme campaigns or personal gifts, a DAF is probably not the best choice.
Finally, check the account fine print for minimums and fees. Schwab and Fidelity both have no minimum investment and admin fees of roughly 0.6% of the assets in the account; some of the larger brokerages have higher minimums and fees.
PERIGON is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 877-977 2555 or by emailing [email protected]
