Donor Advised Fund

Bruce Primeau, CPA, CFP®, PFS |

A Donor Advised Fund (DAF) could be an excellent strategy to consider for people that are charitable, for the following reasons:

  • Instead of donating cash to charitable organizations, you can instead donate appreciated securities from your taxable portfolio.  These securities are immediately diversified and can be invested in a manner to potentially grow the balance so one can give away more to a charity(s).
    • Note that a donation to a DAF is irrevocable and the funds cannot be returned to the donor.
  • Contribute the cash you were going to donate to the charity(s) back into your taxable portfolio.
  • In essence, you’ve diversified an appreciated position at no tax cost.
  • You get a tax deduction in the year the securities are donated to a DAF, not when the funds are actually given to charity(s).
  • By “grouping” your charitable contributions into 1 year, you could maximize the amount of tax saved over a several year time frame.

Here’s an example of how this strategy could work:

  • Bill and Jane are charitable and typically give $10,000 / year to charity.  Because they don’t currently itemize deductions on their federal tax return, they don’t receive any federal tax benefit by making charitable contributions each year as the Standard Deduction ($25,900 in 2023) is greater than their total itemized deductions.
  • Using appreciated securities, Bill and Jane contribute four years’ worth of charitable donations ($40,000) to a DAF in 2023.  They get a $40,000 charitable deduction for this contribution in 2023 and will receive a tax benefit by “bunching” four years of contributions into 1 year.  It doesn’t matter that they won’t give the entire $40,000 away to various charities in 2023.
  • The $40,000 of appreciated securities are diversified immediately with no tax consequences, and the proceeds can be reinvested in a balanced asset allocation.  This creates an opportunity to grow the account balance over time, in hopes of being able to give even more money to charity.
  • They replenish their taxable account with $10,000 of cash in each of the following years they were going to donate to charities in 2023, 2024, 2025 and 2026.
  • They begin considering which IRS-qualified 501(c)(3) charities they wish to grant money to and use their DAF to begin making those donations.  The DAF custodian cuts the checks and mails them to the chosen charities – no more stamps and envelopes for you!!
  • This could be an excellent way to engage your children or grandchildren in the grant making process by asking them to research and recommend grants that are important to them.

We believe a DAF is an excellent strategy for charitable clients with material appreciated taxable assets to consider.  If you consider yourself a charitable person / couple, and this strategy sounds like something you’d like to consider, please reach out to your SWA Advisor and we can schedule some time to discuss this opportunity with you.