Donor-Advised Funds: A Smart Way to Give

You can find several ways to make charitable gifts — but if you’re looking for a method that can provide multiple tax benefits, along with an efficient platform for giving year after year, you might want to consider a donor-advised fund.

Once you open a donor-advised fund (DAF), you can contribute many types of assets, including cash, publicly traded stocks, bonds, CDs or non-cash items such as closely held business interests, art or collectibles. You can then decide how to invest the money, possibly following a strategy suggested by the DAF sponsor organization you’ve selected. The next step involves choosing which charities to support, how often to provide support (such as once a year) and how much to give each time. You’re essentially free to direct the money to any charities you like, provided they’re IRS-approved charitable organizations.

Now, let’s look at the possible tax advantages offered by a DAF:

• Immediate tax deduction – A few years ago, changes in tax laws resulted in a vastly increased standard deduction, which, in turn, led to far fewer people itemizing on their tax returns and having less incentive, at least from a tax standpoint, to contribute to charities. But if you don’t typically give enough each year to itemize deductions, you could combine several years’ worth of giving into one contribution to a DAF and take a larger deduction in that tax year. And you can claim that deduction, even though the DAF may distribute funds to charities over several years.
• Tax-free growth of earnings – Once you contribute an asset to a DAF, any earnings growth is not taxable to you, the DAF or the charitable groups that receive grants from the DAF.
• Avoidance of capital gains taxes – When you donate appreciated stocks or other investments — or for that matter, virtually any appreciated asset — to a DAF, you can avoid paying the capital gains taxes that would otherwise be due if you were to simply sell the asset and then donate the proceeds to charitable organizations. Plus, by receiving the appreciated asset, rather than the proceeds from a sale, the charitable groups can gain more from your contribution. And you can also take a tax deduction for your donation.

While these potential tax benefits can certainly make a DAF an attractive method of charitable giving, you should be aware of some potential tradeoffs. Once you contribute assets to a DAF, that gift is irrevocable, and you can’t access the money for any reason other than charitable giving. Also, your investment options are limited to what’s available in the DAF program you’ve chosen. And DAFs can incur administrative costs in addition to the fees charged on the underlying investments.

You may want to consult with your financial professional about other potential benefits and tradeoffs of DAFs and whether a DAF can help you with your charitable giving goals. Also, different DAF sponsors offer different features, so you will want to do some comparisons. And because DAFs can have such significant implications for your tax situation, you should consult with your tax professional before taking action.

If a DAF is appropriate for your situation, though, consider it carefully — it might be a good way to support your charitable giving efforts for years to come.

This article was written by Edward Jones for use by Joe Oliver, your local Edward Jones Financial Advisor.

Joe Oliver is a lifelong Oxfordian, husband, father, and financial advisor with Edward Joes Investments. Joe services business owners and individual investors by helping them accomplish their financial goals.  For a complimentary financial consultation, connect with Joe at Joe.Oliver@Edwardjones.com.

Joe Oliver, CFP®,AAMS™
Financial Advisor
2250 Baltimore Pike
Oxford, PA 19363
484-702-9311
www.edwardjones.com/joe-oliver

Edward Jones, Member SIPC

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.

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