Tips on Giving to Your Favorite Charities

July 3, 2023

A donor-advised fund is an excellent way to give to charities you care about. In the following guide, learn everything you need to know about charitable giving with a donor-advised fund, including how it works, what benefits it includes, and the differences between a donor-advised fund and a private foundation. Keep reading to learn more. 

What Is a Donor-Advised Fund and How Does It Work? 

A donor-advised fund (DAF) is basically an investment account used for the purpose of supporting charitable organizations that are important to you. You can open a DAF at a financial institution by making an initial tax-deductible donation. When you contribute to a DAF, you are making an irrevocable contribution to charity; therefore, the funds are non-returnable and cannot be used for anything other than the charitable purposes for which they were intended.

You can donate a variety of personal assets to a DAF, including cash, stocks or non-publicly traded assets like private business interests, real estate, cryptocurrency, and more. Once you donate funds to a DAF, your investment grows tax-free, and you can support any IRS-qualified public charitable organization with grant recommendations from your fund. 

One example of a donor-advised fund is the Giving Account from Fidelity Charitable. 

What Benefits Does a Donor-Advised Fund Offer?

A donor-advised fund provides a number of benefits to you, the donor: 

  • 🌟 You receive an immediate tax deduction when you contribute to your DAF, including a federal income tax deduction of up to 60% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for appreciated securities (held for more than a year). 
  • 🌟 When you transfer non-cash assets, such as limited-partnership interests, you can avoid capital gains tax and gain fair market value tax deductions
  • 🌟 You can contribute a wide variety of non-cash assets through your DAF, including restricted stock, publicly traded securities or mutual fund shares, private equity or hedge fund interests, complex assets like privately held C-Corp and S-Corp shares, cash equivalents like checks, wire transfers, or cash positions from a brokerage account, and cryptocurrencies like Bitcoin.
  • 🌟 Your investment grows tax-free, providing the opportunity for more charitable giving dollars down the road. 
  • 🌟 A DAF provides for easy and convenient record keeping. All receipts from DAF contributions are accessible through an online account, and grants can be recommended to IRS-approved public charities by simply logging into your account online. 
  • 🌟 You can personalize your DAF by naming it, appointing family members and friends to oversee the account’s management, and nominating a successor to continue your giving legacy upon death. 
  • 🌟 DAFs can be very affordable overall. For example, the Fidelity Charitable Giving Account has no minimum initial contribution requirement and fees amounting to about 1% of the account balance, which is typically less than the operating costs associated with a private foundation, or the fees associated with making donations by credit card. 
  • 🌟 You can choose whether to recommend grants anonymously or provide contact information for grant acknowledgement
  • 🌟 With a DAF, you can specify the use, campaign, or purpose for the grant recommendation, which the sponsoring organization will relay to the grant recipient. You can also make a grant recommendation β€œin memory of” or β€œin honor of” a loved one. 
  • 🌟 You can include your DAF in your legacy planning by making a bequest in your will to your DAF sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy, or charitable trust. By doing so, you can give to multiple charities through one bequest as well as reduce or eliminate estate taxes for your heirs. 
Keep in mind a few limitations of donor-advised funds:
  • ❎ You cannot support organizations other than IRS-approved 501(c)(3) organizations, including political campaigns and crowdfunding campaigns. 
  • ❎ You cannot recommend grants that would benefit you or yours personally, such as school tuition for your grandchild. 
  • ❎ You cannot make a Qualified Charitable Distribution (QCD) from your Individual Retirement Account (IRA)

What’s the Difference Between a Donor-Advised Fund and a Private Foundation?

Donor-advised funds and private foundations are both popular vehicles for charitable giving, but they are different in several important ways.

First, private foundations are legal entities generally set up by an individual, family, or corporation. Private foundations have greater administrative control over assets and the grant making process and can make grants to organizations other than IRS-qualified 501(c)(3) organizations. Private foundations are responsible for their own record keeping and tax filing. In addition, they are subject to more government rules and regulations than public charities.

Donor-advised funds, on the other hand, may provide somewhat less administrative control over assets and can only make grant recommendations to IRS-approved public charities. However, they are easy, flexible, and convenient to use, and provide many benefits, including the tax advantages discussed above. 

If you are interested in learning more about charitable giving with a donor-advised fund, reach out to the professionals at Honest Buck Accounting. Our team of experts can provide financial guidance to help you find the charitable giving solution that is right for you. Contact us today.

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