Colin Gerrety, CFP®, CIMA®

Colin Gerrety, CFP®, CIMA®

Colin equates success with helping others make good decisions. A DC-area native, Colin works closely with our client families to navigate the complexity of today's financial world.

Many of our clients are passionate about charitable causes while also maximizing the tax benefits of their giving. If this matches your philosophy, then a Donor-Advised Fund (DAF) is a powerful tool for your arsenal. In this post, we’ll explore some of the specifics of a DAF and when this strategy may come in handy. Download our Guide to Donor-Advised Funds for even more information.

First, what is a donor-advised fund? Think of a donor-advised fund (DAF) as your own personal charitable account that acts as an intermediary for charitable giving. A DAF is simply an account, created through a public charity, which holds and invests your money while you wait to distribute the money to other charities. You donate assets, ideally highly appreciated securities, into the fund. That money then becomes available to invest within the fund or distribute to other charitable organizations.

Some of the largest donor-advised funds include Fidelity Charitable Gift Fund, Schwab Charitable Fund, and the Vanguard Charitable Endowment Program, allowing for seamless integration with many investment platforms.

So, why is a DAF so powerful? A DAF can result in even greater tax benefits than contributing cash to charity in two ways:

  1. If you usually take the standard deduction on your tax return, then you are not receiving a tax deduction for your charitable donations. A DAF can allow you to frontload multiple years’ worth of donations and bunch them into one year, allowing you to itemize your deductions in that year and receive a charitable deduction for your charitable contribution.
  2. By donating appreciated securities rather than cash to a DAF, you can avoid capital gains, receive a charitable deduction, and potentially rebalance your investment portfolio without tax consequences all at the same time.

Additionally, one of the key advantages of a donor-advised fund is its ability to simplify recordkeeping. When you contribute to a DAF, your contribution counts as one charitable donation for tax purposes, regardless of how many grants you make with the money to other charities or when those grants are made. This streamlines the process of managing multiple donations, organizing receipts, and compiling information annually to be reported on your tax return.

A DAF can also provide a lasting legacy for future generations. By naming your children as beneficiaries of the DAF, they can continue to make charitable funding decisions after your passing. Consider naming your DAF as a beneficiary of a pre-tax retirement account, such as an IRA or 401(k), in order to continue your charitable legacy while avoiding estate and/or income tax on those assets.

Who is an ideal candidate for a DAF? If you donate regularly to charity, hold appreciated investments, want to simplify your recordkeeping, and want to receive a tax benefit, a DAF can be a valuable tool for you.

In our Guide to Donor-Advised Funds, you will find more detailed information about donor-advised funds and how they work. Please get in touch with your advisory team with any questions or if you are considering a DAF for your situation.

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