“It’s not how much we give, but how much love we put into giving.”
Mother TeresaAs we move into the last quarter of the year, it is important to refocus our energy into the things that mean the most to us and how we can use our gifts and talents to help others.
Charitable giving is an integral piece of life—something that we all should strive for 365 days a year. One thing that can help promote that spirit of giving is creating a plan for your charitable contributions throughout the year, and while there are many ways to do that, one that is becoming increasingly popular is the use of a donor-advised fund.
What is a donor-advised fund and how can it maximize your giving strategy?
Let’s dive in and find out.
What is a donor-advised fund?
A donor-advised fund (DAF) is a vehicle that is used for charitable giving. These funds have been growing in popularity and continue to be one of the most accessible accounts for charitable efforts. In fact, according to the National Philanthropic Trust’s 2018 survey, there are over 450,000 donor-advised funds contributing nearly 30 billion dollars to charities in the last year.
DAF’s allow for donations regardless of tax-bracket or income level. In many ways, DAFs can be thought of as a charitable savings account. Once you set up the DAF, you are able to donate assets such as cash, stocks, real estate, and other investments into the fund to be used for your giving strategy. The DAF is then controlled by a third party to manage the investments for you as you decide when and where to donate the funds.
It is important to note that once you contribute money to the DAF, you will be unable to get that money back for personal use—it remains in the fund until you designate where you would like the money to go. One great benefit of a DAF is that the money inside the account grows tax-free and can be used whenever you as the account owner requests. This level of flexibility can help you donate to the fund throughout the year, knowing that all contributions will be going to a charity of your choice.
DAFs are an excellent giving tool for public charities as well as your local church donations for tithing.
Are there tax benefits to consider?
With the Tax Cuts and Jobs Act, many families had to alter their approach to charitable giving. The standard deduction doubled to $24,000 (tax year 2018) for married couples, making it difficult for people to itemize their deductions. This has changed how people give to charity in a tax-efficient way. Using a DAF can offer many tax benefits. Let’s take a look at some below.
Since the money in your DAF doesn’t disappear, you are able to give to charities whenever you choose. For families who want to take advantage of itemizing their deductions, they decide to give in bulk every other year. For example, as opposed to donating $15,000 each year, in year one a family could donate $30,000 and in year two not make a donation while they replenish their fund. This is a great way to take advantage of the tax benefits while still giving the same amount of money you normally would.
DAFs are a great way to include tax-efficiency into your charitable giving strategy. One of the most impactful tax benefits is that the gains from your donations grow tax-free. If you donate stock, for example, that is initially worth $10,000 but it doubles to $20,000, you won’t be responsible for paying tax on that gain. In using this strategy you save yourself money on taxes and increase the gift you are able to give.
By donating through a DAF you are also reducing your tax burden as soon as you donate. Whenever you donate an asset, you are subject to an immediate tax break. This can be extremely beneficial when looking at your overall taxable income for the year while also making your dollars stretch further.
Investors are often cognizant of the capital gains tax they will need to pay on their investments and donating stocks or other illiquid assets is one of the most popular ways to contribute to a DAF. This is tax-efficient because when you contribute an asset held for at least a year, you can donate them at their fair market value and not pay capital gains tax. Conversely, if the investor sold their asset they would have to pay capital gains tax which reduces the amount that they are able to donate.
You are also able to use the gains from your existing non-qualified accounts and donate those gains to the donor-advised fund, using the proceeds from that to give to your church or community.
How can it impact your approach to giving in retirement?
Charitable giving is an important part of your life and one that drives how you approach the world around you. Using a donor-advised fund can help you hone your approach and strengthen your conviction for consistent giving to your church or other organization.
DAFs can be an excellent tool to fuel your giving in retirement. I know that many of you are charitably-inclined and want to give in retirement, but may not know where to start. By contributing to a DAF, you can budget better for your giving and make it apart of your consistent monthly spending. This can make you more conscious of your giving and dedicated to seeing it through.
The more money you are able to put aside now, the better able you are to say “yes” at the moment. Whether it be for a capital campaign, weekly tithe, or other need, you will have the confidence to know you can help as you have been setting money aside each month for this purpose. This helps integrate charitable giving into your every-day lives and can help you gain a clearer strategy for your giving.
You can give to charities in many ways, using your time, energy, talents, and also through financial compensation. Using your financial resources wisely can not only help you be more tax-efficient but most importantly, can maximize the impact of your gift, giving more to the organizations that mean the most to you.
Wondering how a donor-advised fund could be an asset to your giving strategy? Schedule a time to talk with us. We can’t wait to meet you and help you make your charitable ambitions come true.