‘Tis the season for phone calls from charities, Santas at the grocery store and solicitors at the door. None of these things are inherently bad, but are they the best way to donate your money? Just like anything else with your finances, the more intentional you are the better. Is there a magical way for you to maximize your generosity?
A lot of financial products are as confusing as hell, so don’t go Googling “donor-advised funds" (DAFs). Instead, here’s what you need to know about how DAFs work without all the confusing jargon that sometimes swirls around anything related to finance. (For related reading, see: Donor-Advised Funds: The Benefits and Drawbacks.)
- Donate cash or other assets to a DAF-sponsoring organization.
- Choose your investments. We recommend an evidenced-based investment strategy.
- Decide when and how your money gets to the charities of your choice.
- Reap the tax benefits and maximize your donation. If invested wisely, your generous gift will build wealth and keep on giving.
What to Consider
There are some details to mull over before deciding if a DAF fits your charitable-giving goals. You can give anything from cash (of course) to real estate to life insurance and stocks and bonds. Once the money is out of your hands, you don’t have legal control over it. But, you are the decision-maker when it comes to how the funds are invested and when they are distributed to the charities you recommend.
Notice I said recommend, not choose. According to the legal set up of these accounts, the organization that holds your DAF isn’t required to follow your “advice” but there’s an understanding that they will.
It might seem like heresy to ask this question when we’re talking about giving to others, but let’s be honest - the tax savings are a big deal. If you donate cash, you typically receive an income tax deduction of up to 50% of your adjusted gross income (AGI). If you donate appreciated securities, you save on the capital gains tax and your deduction will be the full fair-market value, up to 30% of your AGI. If you are currently sitting on some big gains in stocks or mutual funds you own, this is a real win-win that’s difficult to overemphasize. (For more from this author, see: 3 Ways to Start Lowering Next Year's Tax Bill Now.)
Another perk is simplicity (you know I always try to sneak my favorite word in somewhere). If you want to give to multiple charities, a DAF allows you to create one account where you can pool your money and dole it out to as many charities as you want, usually with a convenient online platform
Divvy Out Money to Charities Over Time
Timing is also a draw for some. Say your business has a banner year and you want to donate a big chunk of change, but some of the charities you have your eye on are small and can’t handle such a massive influx of money. A DAF lets you get the tax deduction on the full amount in the year you donate it, but you can choose to divvy out the money to the charities over a longer period of time.
Are you too busy at the moment, especially with the holidays right around the corner? A DAF gives you the time to make a well thought out decision to find and research charities that share your values. DAFs, unlike private foundations, do not require a minimum annual distribution. You won’t be rushed to find organizations to give to in order to get the tax benefit for the current year. In the meantime, your investments will likely grow.
Revisit Your Tax Strategy
Is this the first time you’ve heard of a donor-advised fund? Hopefully your head isn’t spinning. If it is, I’ll get you straight. The year is coming to a close and it’s the prime time to revisit your tax strategy and figure out how you want to end the year on a generous note.
In summary, a donor-advised fund might be a good fit for you if you:
- Want to be involved in your giving choices.
- Have multiple charities that you contribute to.
- Think it would be cool to see your charitable donations grow and build wealth.
- Need more time to figure out who gets your money.
- Want to reduce your taxes. (For more from this author, see: How to Build Wealth: 10 Rules Backed by Science.)