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Donor Advised Funds: What are they and should you consider?  Thumbnail

Donor Advised Funds: What are they and should you consider?

Written by: Rachael DeCosta, CDFA®

This past weekend I met a remarkable woman at a yard sale, Debra.  She is a retired schoolteacher, whose husband had fallen ill, and donates her time and money to refugee and environmental organizations.  She wanted to salvage unsold items to be repurposed or recycled.  However, her primary motivation that day was to collect items to furnish and clothe recent refugees in our area.  Debra said keeping track of all her giving was cumbersome; her IRA declined over 20% in 2022; and her financial world was overwhelming.  When I asked if she had considered a Donor Advised Fund (DAF) she said that was totally unaware that such a fund existed.  Debra provided her contact information, and I followed up with her.  After my follow-up, she responded, verbatim:  

I will definitely look at this as I take over my family finances and find ways to increase generational wealth and still donate to my favorite causes!

Debra’s comments were eloquent and resonate with a significant subset of women who share Debra’s life experiences and values - retired, caring for an ailing spouse, -- or not -- and philanthropic. Each of these circumstances present a financial planning need.   She loved the concept of establishing a generational legacy of giving and simplifying her significant charitable effort, and wanted to learn more of the details before embarking on establishing a DAF.

What is a Donor Advised Fund?

Fidelity launched the first Donor Advised Fund (DAF) in 1991, however, only more recently have DAF’s become a significant component of giving in the United States.  DAF programs provide a vehicle for individuals to contribute to charitable organizations, recommend grants to support their chosen charitable causes and receive immediate tax benefits.  

Why should I consider a Donor Advised Fund?

There are several compelling reasons to start a Donor Advised Fund. The following are the top three reasons I share with clients:

1.    Simplified Charitable Giving: A DAF offers a streamlined and simplified approach to charitable giving. By establishing a DAF, you can consolidate your charitable donations into a single account, making it easier to track and manage your philanthropic activities. Instead of making individual donations to multiple organizations, you contribute to the DAF and then recommend grants to the charities of your choice over time. This centralized approach saves time and administrative effort, allowing you to focus more on the impact of your giving.

2.    Tax Advantages: DAFs provide significant tax benefits. When you contribute to a DAF, you receive an immediate tax deduction for the full value of your donation in the year it is made. This deduction can be especially advantageous if you have a large sum to donate in a given year but want to distribute the funds to charities over time. Additionally, by donating appreciated assets, such as stocks or mutual funds, to a DAF, you can avoid capital gains taxes on the appreciation and still receive a tax deduction for the full fair market value of the assets.

3.    Strategic and Impactful Giving: A DAF allows you to engage in strategic and impactful philanthropy. With a DAF, you have the flexibility to take time to research and evaluate charitable organizations that align with your values and objectives. You can recommend grants to support causes you are passionate about, responding to immediate needs or contributing to long-term initiatives. Many DAF programs also provide an opportunity for family involvement, allowing you to engage future generations in philanthropy by including them as successor advisors to the fund.  

Next question, is do I have to be a Rockefeller to start a Donor Advised Fund?  

No. Depends on the program sponsor, an individual or family can start a DAF with $5,000!  DAFs share many of the benefits of a foundation without the administrative complexities and asset requirements.

My conversation with Debra took me back to my Grandma Bub’s kitchen table as she was placing $1-$15 checks in small envelopes to every organization she felt was doing “good”.  We lovingly refer to her as the “poorest philanthropist” who ever lived.  When she passed, my mother found thank you’s upon thank you’s from the organizations to whom she gave.  My mother followed in her footsteps, as did her sisters, as do I, as does my daughter.  With very little, Grandma Bub established a legacy of giving, if only Donor Advised Funds were an option while she was still with us – it would have been a brilliant solution to the paper checks, stamps and reams of solicitations!

If you find yourself in a similar situation as Debra or Grandma Bub and would like to learn more about Donor Advised Funds, please contact me at rachael@sandboxfp.com or schedule a free consult (click here to schedule).   

Remember to consult with a financial advisor or tax professional to fully understand the implications and benefits of opening a donor-advised fund based on your individual circumstances and goals.

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