Learn how donor advised funds work and why they are such a great choice for giving to the charities you love and support.
Looking for a way to support your favorite charities easily and tax-efficiently?
One of the most efficient ways to donate money is through a donor-advised fund (DAF). The donated funds are managed and invested by a third party firm such as Schwab or Fidelity. The donor (the person making the donation) advises the custodian of the DAF to which IRS-approved 501(c)(3) eligible charity or charities to donate, when to make the donation, and how much to donate.
The tax deduction is taken the year the funds are transferred from the donor to the DAF. The gift(s), however, can be stretched out over many years in increments determined by the donor. The charity receives a check from the fund company attributed to the donor’s name or, if preferred, anonymously. It is easy for a donor to make several gifts annually. In addition, the only receipt needed for tax purposes is the one received when making the donation to the fund. It isn’t necessary to keep the receipts from the charities for tax reporting purposes.
Another great way to optimize your tax planning is to donate highly appreciated stocks or mutual funds that are in a taxable (non-retirement) portfolio. The donor can avoid paying the capital gains tax (only if they have held the asset for at least a year) as well as take the tax deduction against current income. Other assets to donate to a DAF include cash, cryptocurrency, real estate and private equity.
It is important to note that once you transfer assets to your DAF they are no longer yours. Although you can direct the custodian of the assets where to make a donation, you can’t change your mind and transfer the funds back to your personal account.
Charles Schwab and Fidelity are two reputable providers of donor-advised funds. An account is opened in your name, and once you make a donation you can choose an investment strategy for your donated amount. This allows your donation to grow over time, thereby increasing the impact of your gifts.
If you have questions about your charitable planning or donor-advised funds, please call Jenifer.
Jenifer Aronson is the Founder of Mosaic Fi.