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Donor-advised funds are “a one-stop shop” for managing your charitable giving, offering convenience, flexibility and tax advantages.
GIVING TO THE CAUSES YOU CARE ABOUT may be top of mind for you this year, as the world grapples with the effects of a pandemic. You may also tend to increase your donations during holidays throughout the year, when charities and nonprofits tend to up their appeals. But as you write out checks or donate online, don’t you often wish there were a more organized and thoughtful way to make a difference year-round? A way to plan for a more powerful and long-lasting impact?
If so, you may be ready to consider a donor-advised fund (DAF). It’s a more structured way of giving that’s receiving increasing consideration. “Donors contributed $37.12 billion to donor-advised funds and used them to recommend $23.42 billion in grants to qualified charities in 2018”—record highs in both categories, notes the National Philanthropic Trust in its 2019 Donor-Advised Fund Report. For those who plan to itemize deductions on their income tax return, DAFs are “a one-stop shop, offering you an immediate income tax deduction and gift receipt upon donation, as well as the opportunity to make grant recommendations to the charities you support over time,” says Cale Turner, senior vice president and Charitable Gift Fund manager at Bank of America Private Bank.
“A donor-advised fund gives you the ability to invest your contributions by choosing from model portfolios. And what that does is to potentially give you more dollars to support the charities that you want.”
The minimum deposit varies depending upon the fund. Your donation can be in the form of cash, stock, mutual fund and ETF shares, even real estate and other nonfinancial assets, without incurring capital gains taxes. To add to the convenience, a DAF is easy to set up and maintain, and you can manage all of your giving activities online.
Donor-advised funds do come with some limitations—for example, your gift is irrevocable; you give up ownership of any assets you contribute. But, all things considered, DAFs compare favorably with other structured ways to organize your charitable giving. For instance, with a DAF, you can avoid the higher costs, administrative hurdles and annual distribution minimums of a private foundation.
Below, Turner points to three ways a donor-advised fund could help you simplify your giving year-round—and for years to come.
It works like this: You can put a lump sum into a DAF and then have the fund distribute cash to organizations of your choice at your own pace. “You get the maximum income tax deduction immediately, even if the assets aren’t distributed right away,” says Turner. You’ll have the ability to carry forward any unused charitable income tax deduction for up to five years, and assets in the fund can grow free of income tax, maximizing your impact. In exchange, you relinquish ownership of the assets you donate, but you retain the right to advise how those assets should be distributed. (Even if you don’t plan to itemize, under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law in March 2020, you may claim a deduction in 2020 of up to $300 for cash gifts to qualifying charities, not including DAFs.)
“Taxpayers looking for ways to exceed the higher standard deduction set by the 2017 tax law might consider pooling several years’ worth of charitable donations into a single contribution to a DAF,” suggests tax expert Andrew Friedman, principal and founder of The Washington Update.
Rather than practicing “checkbook philanthropy” by making donations to individual charities and requesting receipts from each, you can take much of the paperwork out of the process through a DAF. As Turner notes, “Those things are taken care of—the system allows you to hold on to all those documents in a safe and secure location.”
“A donor-advised fund gives you the ability to invest your contributions by choosing from model portfolios,” Turner says. That means the assets you’ve placed in the fund are professionally managed and have the potential to continue growing. “And what that does,” Turner adds, “is to potentially give you more dollars to support the charities that you want.”
Ask your financial advisor for more information on how a donor-advised fund works, and whether the Bank of America Charitable Gift Fund might help you meet your giving goals.
Merrill, its affiliates and financial advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.