Using A Donor Advised Fund for Your Charitable Gifting

A change in the tax code in 2017 made Donor Advised Funds a lot more attractive to the merely affluent Americans, not just the wealthiest. A Donor Advised Fund basically functions like a charitable foundation for the not yet uber-rich. The reason this vehicle became more attractive is that the limits imposed on itemized deductions – limits on state and local taxes, to be exact – reduced the tax benefits of giving to charity. This is because many people who used to be able to itemize charitable contributions of a few hundred or a few thousand dollars a year were no longer able to do so. Most people continue to support their favorite charities, but they aren’t receiving the same tax benefits of doing so.

One strategy that was developed to get around this limitation was to combine several years’ worth of gifts into a single year. For example, instead of giving $5,000 to charity each year, you would give $25,000 in a single year then forgo the annual contributions. One of the simplest ways to do this is with a donor advised fund.

The strategy works like this. Suppose you would normally give $5,000 to charity, but that wasn’t enough to allow you to itemize your tax deductions. By funding a donor advised fund (DAF) with a large lump sum in one single tax year, you get the large, itemized tax deduction in one year, then take the standard deduction for the next few years. At the end of five years, you would likely end up paying less in taxes than if you made non-deductible contributions to those same charities over 5 years.

As you can see in this example, your total deductions at the end of five years would be higher than if you just gave funds to the charity each year.

Donor Advised Funds are fairly easy to set up, but they do have some rules you need to be aware of.

• A donor advised fund can be used to pay for things like a paddle raise at a charitable gala, but it cannot be used for legally binding financial commitments like pledges you’ve made to a charity.
• A donor advised fund can be used to buy tickets to an event that you don’t plan to attend, or other support that is 100% tax deductible, but it could not be used to pay for sponsorships, dinner, or auction items at the event. That’s because these items have some benefit to you that is not tax deductible.
• Memberships that provide only incidental benefits can be funded by a donor advised fund. Because you often receive items in return for things like Zoo or public media memberships, you probably can’t use a DAF for these memberships, but you can the DAF to fund general gifts to these charities.
• A donor advised fund can be used to fund scholarships, so long as the donor or a related party isn’t a beneficiary of the scholarship, or the main person deciding who receives the scholarship.

For commercial DAF’s like those sponsored by Charles Schwab, gifts can be directed as small as $100. And nearly any asset can be used to fund a DAF, including appreciated securities, real estate or even business interests. By donating appreciated assets, you get an additional tax benefit by avoiding paying capital gains taxes.

In our practice, we’ve used Donor Advised Funds sponsored by Charles Schwab, the San Diego Foundation and Jewish Community Foundation, depending on the client’s needs and objectives and the complexity of the gift you want to use to fund the DAF. It really does give you more flexibility in your charitable and tax planning.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at rbrooks@bfadvisors.com. Brooks and his family live in Mission Hills.

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