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Tax Strategies To Consider For Donor-Advised Funds

By Sara Gelsheimer. Originally published at ValueWalk.

Donor-Advised Funds Coronavirus stimulus check from Pennsylvania

Donor-advised funds — also known as DAFs — are one of the fastest-growing philanthropy options in the country. In fact, contributions to DAFs reached an all-time high in 2020, totaling $47.85 billion, and annual grant-making from DAFs has grown fourfold in the past 10 years.

Q4 2021 hedge fund letters, conferences and more

Q4 2021 hedge fund letters, conferences and more

So what is a DAF, and why is it becoming so popular? Essentially, it’s an investment account that allows givers to donate to a range of charities they care about on a flexible basis. They permit people to contribute cash or appreciated securities, are immediately tax deductible, and allow givers to invest contributions so they can grow over time.

Why Encourage Clients To Use A Donor-Advised Fund?

The benefits of DAFs are several, not only for your clients as the owners, but also for the charities they support.

Because the standard deduction almost doubled in 2017, far fewer people are itemizing their deductions, which includes contributions to charities. DAFs allow your clients to give several years’ worth of donations in a single year, bumping their itemized deductions above the standard deduction and thus giving them tax benefits for their charitable donations.

Another big benefit of DAFs is that your clients can vary the way in which they deduct their charitable giving depending on the year. If they’ve had a particularly high income one year or an unusual windfall (such as a work bonus, for example), then they can set aside a larger amount for charity and offset their larger tax responsibility — all without having to give all that money to charity in one year. A client of mine chose to do this the year she sold her business; she itemized her deductions for the year and received a nice tax benefit from her charitable contribution. She was later able to give that large amount to various charities over the next several years.

Again, contributions to DAFs can also be invested. So if your client doesn’t want to distribute funds immediately, they can reserve a portion of their gift to grow tax-free. Then, when they do decide to donate to charity, the amount is (hopefully) much higher — thereby increasing their philanthropic impact. It’s a win-win.

Interested in supporting your clients by maximizing their giving through DAFs? Here are a few things to keep in mind:

  1. Encourage Charity To Come First.

Although DAFs have good tax benefits, taxes should never dictate whether or not a client decides to give. Clients should start by deciding if they want to give and what specific causes they are most passionate about. From this list, you can help your clients find charitable organizations that match their interests and then put a game plan in place as to the best way to accomplish their charitable intent.

  1. Don’t Let Clients Delay In Opening A DAF.

If your client is interested in a DAF, help them open one as soon as possible. Even later on in the year, they could start adding money to the fund before the end-of-year cutoff and report their first sum as an itemized deduction (assuming the DAF contribution and other deductions put them over the standard deduction) — regardless of whether the client has decided what charities to give to.

  1. Tell Your Clients About Appreciated Securities.

When setting up a DAF, don’t just think about funding everything with cash. If your client has a taxable account with stocks, mutual funds, and ETFs that were purchased more than a year ago and have appreciated in value, it would be advantageous to move shares of the funds into the DAF (so that no one ever pays taxes on the gains).

For example, let’s say your client would like to give $50,000 to a DAF. If they have $50,000 worth of funds in a brokerage account (that they paid a total of $30,000 for), they can move those shares to their DAF, and no one would ever have to pay taxes on the $20,000 of appreciation. And if your client has $50,000 of cash that they had originally planned to contribute to the DAF, they can instead use that cash to repurchase the funds they moved into the DAF, thus resetting your client’s cost basis.

  1. Make Sure Your Client’s Fund Has A Successor.

Part of helping your client plan a good DAF strategy is to clarify what will happen to their funds in the event of their death. To cut out any potential confusion, help them set up a successor or end charities so contributions can continue to grow and your client’s charitable wishes can be fulfilled. Otherwise, you can advise them to hand over the DAF to their children or other relatives to continue the good work of the fund.

The benefits of DAFs have undoubtedly been a well-kept secret for a while, but the funds are fast becoming a go-to method for intelligent charitable giving. For your clients who want to give to charity each year but are taking the standard deduction, this could be a way to get a great tax benefit for their generosity. Be sure to bring this topic up if it seems like a way for your client to reach their financial goals. It’s up to you to spread the word!

About the Author

Sara Gelsheimer is a senior wealth manager at Plancorp, a full-service wealth management company serving families in 44 states. Sara came to Plancorp with a strong financial background and a commitment to financial education, particularly for women. With this passion, she founded InspireHer: Plancorp’s Women’s Initiative, which inspires financial confidence in women through education and impactful support.

Disclosure: This material has been prepared for informational purposes only and should not be used as investment, tax, legal, or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal, and accounting advisors.

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