Giving back is about more than just numbers on a balance sheet. It's about supporting the causes that define your values and making a tangible difference in the world. We know you want your generosity to go as far as possible without getting bogged down in complex administrative hurdles.
What is a donor-advised fund exactly?
Think of a donor-advised fund (DAF) as a charitable investment account. It's designed to give you tax benefits, flexibility, and ease of administration all in one place. When you contribute to a DAF, you get an immediate tax benefit, but you also retain advisory privileges over how those funds are distributed to charities.
You can donate cash, stocks, or even non-publicly traded assets. These contributions are accepted by sponsoring organizations, such as the National Philanthropic Trust. It's important to know that contributions to a DAF are irrevocable. This means once you put the money in, it cannot be changed or taken back. It must be used exclusively for grantmaking to charities.
Once the money is in the fund, the sponsoring organization assumes legal control, but you still call the shots on where the grants go. You make recommendations to support your favorite causes, and the fund administrator reviews and approves them. In the meantime, the assets in the fund can grow tax-free, which increases the amount available for your future contributions.
Why are DAFs becoming so popular?
Donor-advised funds are currently the most rapidly expanding charitable giving vehicle in the United States. They offer a unique mix of convenience and flexibility that appeals to many donors.
According to the National Philanthropic Trust 2022 Donor-Advised Fund Report, donors added more than $73 billion to DAF accounts in 2021. That is a 47% increase compared to the previous year. This growth is largely driven by the democratization of philanthropy. DAFs make strategic giving accessible to a broader range of donors, not just the ultra-wealthy, allowing for greater grassroots participation.
How to maximize your tax benefits
Please note: Facet is not an attorney and does not provide tax or legal advice. Consult a qualified tax or legal professional regarding your specific situation.
One of the biggest reasons to consider a DAF is the tax efficiency. You can claim an immediate tax deduction when you contribute, and then decide later which specific charities will receive the money. This separation of "contributing" and "granting" is a powerful tool for your financial roadmap.
Income tax deductions
If you donate cash, you may qualify for a deduction of up to 60% of your adjusted gross income. For other assets, the IRS regulations state that you can claim a deduction of up to 30% of your adjusted gross income. These assets include:
- Appreciated securities (investments with gains)
- Mutual funds
- Real estate
- Other non-cash assets
Avoiding capital gains tax
Donating appreciated assets is a smart way to enhance your tax efficiency. If you donate long-term appreciated securities directly to the DAF rather than selling them first, you can avoid paying capital gains tax on the appreciation. Plus, you can deduct the full fair market value of the assets.
This usually results in a larger tax deduction compared to selling the assets yourself and donating the cash proceeds. It's an excellent opportunity to get the most out of your donations.
Choosing the right sponsor for your fund
Selecting the right DAF sponsor is important because each type offers different benefits. Here are the three main categories.
Community foundations
These organizations provide deep local knowledge. They help you connect with specific issues in your area and offer a high level of community expertise. They offer simplicity and superior income tax charitable deductions compared to private foundations. They are great for funding projects that enhance community health, education, or the arts.
National DAF organizations
These are charitable entities that operate on a national scale. Examples include the Vanguard Charitable Endowment Program, the Schwab Charitable Fund, and the Fidelity Giving Account. They are often affiliated with financial institutions and can help simplify the donation process, conduct due diligence, and provide advice on eligible grant recipients.
Public foundations
Public foundations, such as those run by universities or hospitals, focus on specific missions. They handle administrative tasks like recordkeeping and tax receipts. They are public charities that control the assets of the DAF and may enable you to give to specific foreign charitable organizations or projects.
Donor-advised funds vs. private foundations
If you're comparing a DAF to a private foundation, there are key differences in legal requirements and flexibility.
DAFs are typically operated by a section 501(c)(3) nonprofit organization. They usually require a contribution between $5,000 and $25,000 to get started, though this varies. Private foundations are legally distinct entities subject to stricter oversight rules and rigid tax laws.
Administrative ease
Private foundations require significant administrative oversight. You might need to hire staff or outside advisors to handle compliance, tax matters, and officer compensation. DAFs remove this burden. They offer control over grantmaking without the need for extensive management or paperwork.
Deduction limits
Donors to a DAF can receive an income tax deduction of up to 60% of their adjusted gross income for cash donations. In contrast, a gift to a private foundation is generally limited to a 30% deduction.
Strategies to grow your impact
To truly unlock the potential of a DAF, you should be proactive. This involves both investment strategy and legacy planning.
Invest for growth
Since the money in a DAF grows tax-free, you have the option to suggest investment strategies that align with your timeline. You can tailor an asset allocation that fits your risk tolerance, potentially increasing the funds available for grants down the road.
Legacy planning
DAFs can play a significant role in your estate planning. You can name successors or beneficiaries to continue your philanthropic legacy. You can do this by logging into your account, navigating to the "Successor" tab, and nominating individuals or charities.
Using a DAF can also help reduce estate taxes. Assets that pass to a qualifying charity through a DAF are not subject to estate tax, which reduces your overall estate tax liability.
The Facet difference
At Facet, we believe your financial roadmap should be as unique as your values. We don't just look at the numbers; we look at the life you want to live and the impact you want to make. Our flat-fee membership model means we never charge a percentage of your assets. This is crucial for philanthropists because we have no incentive to keep your money in an investment account if you'd prefer to move it into a donor-advised fund.
We act as your partner, helping you optimize your giving strategy so you can support the causes you love while staying on track with your own financial wellness. It's about empowering you to use your money as a tool for self-fulfillment and doing good.
