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Make Your Charitable Giving MORE Tax-Efficient Thumbnail

Make Your Charitable Giving MORE Tax-Efficient

I am prone to write about things that I’m interested in – which my wife could tell you is a very broad, unusual and seemingly uncorrelated assortment of topics, ideas and issues.  Sometimes I have wandered into public policy in newsletters – but only when that policy has implications either directly or indirectly for money and investing.  Hopefully I have remained sufficiently politically agnostic to not earn your scorn.   

Whether it be esoteric, big picture policy discussions or more practical “where the rubber hits the road” discussions about a topic where I believe readers can do better than most are – I hope you find this newsletter engaging and helpful.  This week’s newsletter topic should be very practical for many readers.

On Sunday I had a discussion with some friends about an underutilized tool known as Donor Advised Funds or DAF’s that should be used by more families who regularly make charitable contributions so they can save money on taxes.  My friends were not familiar with DAF’s or how to use them – so I thought I could share why I think they’re worth consideration by many.  

What is a Donor-Advised Fund?: 

A Donor Advised Fund (DAF) is a charitable investment account established for the purpose of maximizing flexibility and tax-efficiency of charitable giving.  It allows donors to make a charitable contribution of either cash, appreciated stock or even a business or appreciated real estate and receive an immediate tax deduction! The donor gets a deduction on their taxes for the gift in the year it’s contributed to the DAF but is allowed tremendous flexibility on the timing and ultimate charitable destination of those gifts.  

DAF’s are the fastest growing vehicle for charity in the United States – primarily because of all the tax and flexibility already cited.  

Other advantages include but are not limited to:

  1. Ability to gift highly-appreciated assets to charity – and to take an immediate deduction based on their value.
  2. Spread the actual distribution of those assets to the destination charity or charities (such as tithing to church) over a period of years.  
  3. The ability to gift anonymously (and stay off pesty mailing lists).    
  4. Typically, DAF’s have provisions allowing you to name a successor donor or donors.  That means if you die someone else can now make grants to charity from the DAF.  This is a great way for well-to-do families to create a legacy of family charitable giving.   
  5. Funds donated to a DAF can be invested.  If you intend to have a long-term use of the funds you could invest in stocks and bonds but if only a short time frame you could use cash equivalents like money market funds or CD’s to preserve the value of your contributions.
  6. No need for lengthy and expensive legal work – which is necessary if you were to choose a private foundation instead of a DAF.  You also have a higher contribution threshold which applies to your gift in a DAF.
  7. Unlike private foundations which are required by the IRS to gift 5% of their assets annually, DAF’s are not required to make any annual gifts.  
  8. And finally, my discussion with friends centered around what I think DAF’s can frequently be used for in many middle and upper-middle class families who make regular charitable contributions to church.  DAF’s can be used as a tool in conjunction with the higher standard deduction available from the 2018 Tax Cuts and Jobs Act. This legislation greatly increased the standard deduction for many families.  Families who used to get an itemized deduction for their charitable contributions combined with mortgage interest and other deductible expenses when the standard deduction was only 13k are now consistently taking a standard deduction which is currently $27,700 in 2023.   How the DAF could save money on taxes is instead of contributing monthly directly to church – contribute to the DAF at the beginning and then again at the end of a calendar year (stacking two years’ worth of contributions into one year of DAF contributions).   Then make quarterly or semi-annual grants from the DAF to your church.  Those who get the greatest benefit from this strategy are families who find themselves with calculated itemized deductions which are close to or slightly over the standard deduction. This strategy can save them $2k-7k on taxes every other year.  That’s real money!

Using a DAF effectively requires some expertise and experience.  There are hundreds of organizations that provide Donor-Advised Funds but for most people who would use it primarily to make charitable gifts I’d suggest using organizations like Deseret Trust or Schwab Charitable Gift Fund.  I’d suggest you talk to your financial advisor and/or accountant about whether the use of a DAF makes sense for your situation.  If your financial advisor is not familiar with this strategy, give me a call and I’ll help.