How to be strategic and financially sound when supporting the charities you believe in.

Supporting charities we believe in is important to my husband and me, but we want to do so strategically and in a financially sound way. To facilitate our donations for decades to come, we made the decision to open a Donor Advised Fund in 2016. This fund allows us to make distributions each year to nonprofits we believe in and also saves us quite a bit on our taxes.

What’s a Donor Advised Fund?

A Donor Advised Fund (or DAF) is a vehicle through which you can make tax-advantaged charitable contributions to nonprofits of your choice. They have several advantages:

First, your DAF contributions are tax-deductible in their entirety in the year you make them. In other words, if you know you’re going to have a high tax year, that’s a great time to open up a DAF because you’re able to take the deduction in full that year even though you don’t need to disburse all of the money to charity that year.

For example: If you contribute $50,000 to a DAF in 2017, that entire amount is tax-deductible for 2017. Then, you can distribute that money to nonprofits over any span of time you’d like — it could be several years or the rest of your lifetime. The only requirement is that the money in a DAF must go to support charities that are in good standing with the IRS, meaning they are registered 501(c)(3) organizations. Note: You can’t use the money in a DAF for a donation where you’ll receive goods or services in return, such as to buy a ticket to a charity’s gala dinner.

Second, you can contribute assets and/or cash to your DAF, which can provide another tax advantage. My husband and I contributed our most appreciated assets — index funds purchased in 2009 — because they’d seen considerable appreciation. Contributing those assets to our DAF means we avoided the capital gains taxes we would have incurred had we instead sold those assets. Plus, we can deduct the full market value of these securities from our taxes.

Third, opening a DAF lets you strategically plan your philanthropic giving for years to come. In the past, my husband and I sporadically gave donations to charities, but we weren’t consistent or organized. Now, we discuss which organizations we want to support every year and at what level. Knowing that we have our DAF with money earmarked for charity means we’ll be consistent philanthropists for the rest of our lives. For nonprofits (especially smaller ones), knowing they can depend on a donor’s contributions year after year is tremendously helpful in planning out their budget. Conversely, if a donor makes a large gift one year and then no gift for the next five years, it’s tough for the organization to map out how much money they’ll have to work with in a given year.

Fourth, the money in a DAF is invested in the stock market, which means it stands to grow tax-free over time. Many donors decide to contribute a percentage of the spin-off from these investments each year. This is the route my husband and I plan to take because it will ensure we have money to donate year after year. You can also add more money to a DAF at any time (and realize all those tax advantages for that year).

Finally, giving through a DAF reduces some of the administrative burdens on a nonprofit, since they don’t need to issue tax acknowledgements for DAF gifts.

How Can I Open My Own DAF?

Anyone can open a DAF and there are thousands of different vehicles to open an account. Many brokerage firms, banks, and community foundations offer DAFs; however, not all are created equal. While all DAFs enjoy the tax advantages I outlined above, not all operate in the same way. A few key differences are administrative fees charged for managing your money and minimum balance required. I highly recommend comparing these aspects of any DAF you’re considering.

My husband and I opened our DAF through Fidelity for the following reasons:

  • Fidelity doesn’t charge anything for opening a DAF.
  • There’s no minimum balance required (some funds charge a penalty if you dip below a required minimum amount).
  • The minimum required to open the account is $5,000.
  • The administrative fees are low.
  • We were able to choose to invest our DAF in low-fee index funds, which is our preferred method for all our investments.
  • Their online interface is easy to navigate; they’re also available via phone, should we have any questions.
  • The minimum gift amount allowed is $50 and there’s no maximum.

Fidelity is not the only bank to offer a DAF, but this framework should give you an idea of what to consider when choosing yours. The Chronicle Of Philanthropy offers a helpful comparison chart of the fees from 74 different DAFs.

How Will the Charity Know I’ve Donated?

Once you’ve established your DAF, you can start making gifts to the charities of your choice. You simply inform your DAF of the amount and destination for your donation and they cut the check for you. Before establishing your DAF, you’ll want to determine how this process works to make sure it’s convenient: Can you do it online or do you need to call or send a letter?

When you establish your DAF, you’ll enter the information you’d like nonprofits to receive about you as the donor. You can simply put down your name, or, if you’d prefer to give anonymously or in honor of a family member, you can do that, too. The charity will then receive a check from your DAF, with a cover letter clearly indicating who donated the gift.

After a distribution is made from your DAF to a charity, you should not receive a tax acknowledgment letter from the nonprofit directly, because you’ve already taken the tax deduction at the time you contributed to your DAF. If the nonprofit mistakenly does send you a tax acknowledgment letter, simply disregard it. What you should receive is a thank you letter from the nonprofit informing you they received your gift.

Contribute to Sustainable Philanthropy

Utilizing a DAF is an easy way to make your philanthropy sustainable for the long term. It ensures you have a pool of money segregated for charitable purposes and it’s a way of reminding yourself to make contributions consistently to the organizations you care about. The tax advantages of a DAF are also fantastic and make sense if you’re experiencing a high tax year. And if you anticipate lower tax years in the future — for example, after you retire — opening a DAF while you’re still working and earning at your peak income level makes all the more sense. Before opening our DAF, my husband and I were haphazard in our giving. Now, we’re focused and thinking about the long-term impact we’d like to have on nonprofits doing work we consider vital to our society.

Mrs. Frugalwoods writes at
about her journey to financial independence by age 33
and a homestead in the woods with her husband, daughter,
and greyhound Frugal Hound.

Any third-party resources or websites referenced above are not under Society of Grownups control. Society of Grownups cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.

While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.

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