Donor Advised Funds | DAFs | All you need to know

Donor Advised Funds or DAFs are a great way to give to the charities and organizations that you love while maximizing the tax deductibility of those donations.

They key here is a bunching strategy, where you contribute multiple years of donations to a DAF, and then the DAF distributes funds where you want over a period of time based on your recommendations.

Even better if you can fund your DAF with highly appreciated securities (like company stock), property, or ownership rights.

Transcript:

Let's talk about donor advised funds, DAFs. I'm Chris Kaminski, co-founder and partner here with Consilio Wealth, where we specialize in working with tech professionals at Amazon, Microsoft, Meta, and Google.

Donor Advised Funds are a great way to improve your deductions from a charitable standpoint and also still be able to give to the organizations that are important to you. The key here is what's called a bunching strategy. The Donor Advised Fund is an account that you can contribute an amount of money to, and you can take the full deduction for the amount contributed to that account in the given year.

Let's say that I normally give $20,000 a year to various organizations. So that's 20 this year, 20 next year, 20 the year after, and let's say that with everything that I have going on in my tax return, that amount doesn't really help me that much. Maybe I itemize deductions, maybe I take the standard deduction, but that amount really doesn't push me over any thresholds I'm not actually getting the full benefits of deducting the $20,000 of donations. Insert donor advised fund.

If I have a donor advised fund, I could, for example, contribute three full years, let's say $60,000 to the donor advised fund. I would get the full $60,000 deduction in the year that I made that donation to the DAF and then I would skip year two and I would skip year three. Year two and year three on my tax return, I'm falling back to probably just taking the standard deduction or maybe just itemizing, and then in year four, when my DAF runs out, I'm going to replenish it with another $60,000. Mechanically how this works is when you fund a donor advised fund, you lose control of the money.

So, the money goes into a donor -advised fund, you are now hiring somebody at the other end of that fund. Maybe it's Fidelity Charitable, maybe it's Schwab Charitable, there are a number of providers that offer these funds. You are then recommending to them which organizations do they make the donations to. Now, they're not in business to not do what you want, but because you make a completed gift to the DAF, you no longer have any control. In general, you can't control the investments. You can recommend the investments, and what I mean by that is one of the best things to put into a donor advised fund is a highly appreciated security.

Let's say you happen to have Amazon stock at 50 bucks a share, and today it's worth $185 a share. You got a big gain on that, it would be great to contribute those shares into the donor advised fund. Now you can't contribute the shares to the donor advised fund and then just let them sit in the Amazon stock. Most of the time, because there is a investment committee behind the donor advised fund, they would not allow that level of concentration because they believe it's not in the best interest of the charities that would in the future be receiving your funds. So you'd be forced to sell within a set period of time and redeploy that capital into other more diversified funds.

Of note, however, once money is contributed to the donor advised fund, that sale and reinvestment is a non-taxable event to you. That's why it's very impactful to contribute highly appreciated securities into a donor advised fund versus cash because when you do so, you don't have to pay the capital gain. Of note, when you contribute cash, you're limited to 60% of your AGI is the maximum deduction. When you contribute highly appreciated securities, you're limited to 30% of your AGI as the max deduction.

So, take these things into consideration before you're making your gifting to make sure that you don't over gift in a specific year and then you don't actually get to take the full deduction. In sum, the strategy here is all about bunching. If you can bunch all your charitable contributions into a single tax year, you can increase the amount of deductibility that you get. And then systematically you make a recommendation to the donor advised fund to give $20,000 a year in my example. So, 60 goes to 40 and then 20, the donor advised fund is run out and then you replenish it. By replenishing with bigger sums of money, again, you are bunching into a single tax year, but you're still accomplishing your goal, which is to give 20 ,000 a year to each organization.

Generally speaking, these accounts don't have minimums and also you can contribute other highly appreciated securities or other things to these accounts, not just stock. Most common thing we run into is stock and cash, but you could actually contribute shares of a company that you own. You can contribute privately held business shares. You could contribute shares of a privately held company that you own.

You could contribute pre-IPO shares in some cases. You could even contribute house or other private businesses that you own. DAFs do come with some fees, but they're generally reasonable related to the overall tax deductions that you're able to get, especially because the purpose of this is to bunch and bunching improves your tax deductions. Any questions on DAFs? Reach out to us.