Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “What is a Donor-Advised Fund?” A Donor-Advised Fund is a tool that can be used to help facilitate donations to charity while providing potential tax benefits to the donor. They’re largely used as a tool that makes charitable giving more convenient, while also providing some flexibility. While the first Donor-Advised Funds were created in the 1930s, they’ve grown in popularity over the last decade as institutions such as Charles Schwab and Fidelity have made them more cost-effective and easier to use.
Donor-Advised Funds can be thought of as special accounts where donations can be gifted, but the donor can maintain some control over how their donations are treated after being gifting. For example, I can donate $10,000 to a Donor-Advised Fund and receive an income tax deduction, but I can then decide to invest my $10,000 gift into mutual funds in hopes that my gift will grow to $12,000. One major benefit to Donor-Advised Funds is the ability to invest the dollars after being gifted. I can also decide to keep my $10,000 gift in my Donor-Advised Fund for a year or more before giving it to a specific charity. This means someone can make a gift to their Donor-Advised Fund to receive a potential current-year tax deduction, but actually send the dollars out of the Donor-Advised Fund to various charities at a later time. Because of this unique timing feature, many people make larger donations to Donor-Advised Funds in a single year for a larger tax deduction, while then gifting the dollars to charity in the following years. It’s a bit like taking three to five years worth of donations you were planning on making anyway and grouping them into one tax year for tax reasons, especially if that tax year is higher than normal.
Another reason many people enjoy their Donor-Advised Fund is the ease of making gifts into and out of the fund. You can gift cash into the fund, but you can also gift appreciated stock. With appreciated stock, if you paid $10,000 for a stock that’s now grown to $20,000, you obviously have $10,000 of gains. As long as those gains are long-term capital gains, the IRS allows you to transfer appreciated stock into a Donor-Advised Fund to receive a potential tax deduction on the pre-tax amount of $20,000. This means you could receive a double tax benefit by deducting the value of the stock as well as avoiding long-term capital gains taxes. If you want to give money to 10 different charities, rather than transferring various stocks to each one, you can make one transfer to a Donor-Advised Fund and then gift cash to each charity from the fund. Speaking from experience, it’s much easier this way. Some Donor-Advised Funds also allow for the donation of real estate, life insurance, cryptocurrency and business assets.
It’s worth noting that most Donor-Advised Funds do require a minimum amount of gifting out of the fund every year or so, such as $50. It’s also worth noting that gifts from a Donor-Advised Fund must generally be made to a house of worship, government agency or a 501(c)(3) charitable organization. Since the dollars must be ultimately gifted to charitable causes, the IRS allows some level of flexibility and benefit by using a Donor-Advised Fund. Overall, it’s no surprise why this unique tool continues to grow in popularity, especially for those that are charitably inclined.
If you have a question about this topic or have a question for next month’s video, please send it to MPeek@monetagroup.com. Thanks for watching and we’ll see you next month.
©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.
