I have been reviewing the benefits of Donor Advised Funds (DAFs) with clients as a way to get the most out of their charitable giving considering many are now seeing the impact the recent tax law change has had on the deductibility of donations.

I believe DAFs are a great tool to continue to give to charity and receive a deduction.

A Donor Advised Fund is an account set up by making an irrevocable donation to an account solely for the purpose of making charitable donations now and in the future.

If properly funded, a DAF benefits a person in three ways:

  • They get a tax deduction for the year the funds were donated to a DAF whether it is cash or appreciated securities, or something else.

  • They may be able to avoid capital gains tax by donating appreciated securities.  For example, if a person bought 100 shares of Apple at $50 a share, and they increased to $170 a share – by donating these shares they receive a tax deduction in the year the donation was made of $17,000 (the appreciated amount), and they avoid the capital gains tax on $12,000!

  • Using the example above, the $17,000 grows tax-deferred in a DAF because the funds can be invested enabling the $17,000 to continue to appreciate.

Going forward, the client now has a $17,000 pool of money to make donations (potentially anonymously, if they so choose) in perpetuity, or until the money runs out.

The name “donor-advised” comes from the fact that future donations made from the DAF are directed by the person who established the fund.  Grants can be made only to IRS-qualified public charities. These are organizations that are tax exempt under section 501(c)(3), and either:

  • are classified as public charities under section 509(a)(1), (a)(2) or (a)(3) of the Code; or

  • are classified as private operating foundations under section 4942(j)(3) of the Code.

Eligible public charities include the full range of charitable organizations, including hospitals, scientific and medical research organizations, religious organizations and places of worship, environmental and educational organizations, museums and arts organizations, and any other organizations or institutions formed and operated for charitable purposes.

It is important to note that when a donation (in DAF parlance, a grant) is made from a DAF it does not give the account holder an additional deduction.  The tax deduction is taken at inception, or with subsequent contributions to a DAF only.

Many custodians such as Vanguard, Fidelity and Charles Schwab have specific websites and funds dedicated to this.  There are also specific DAFs, like the Jewish Communal Fund or other public charities.

The custodian establishing the fund may charge an annual fee and, because you can invest the money you have donated, and there may be additional fund fees, so it is important to do your homework before choosing one.  There are other questions to ask for before proceeding, such as: what are the minimums for establishing the fund, what are minimums for additional contributions to the fund and what is the minimum grant amount allowed?  (There are some DAFs that have minimum grants of $250, which may not work if you typically give $50 to the charity.)

As DAFs have grown in popularity, many not-for-profit organizations have added a link on their website giving donors the ability to make a donation directly from their DAF.

Please do not hesitate to call us if you would like to learn more about how you can continue to benefit from charitable donations.  The tax law made it more difficult, but we can share strategies that make it possible.

Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.

For additional information about Modera, including its registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. The case study represented here is hypothetical in nature and is used for illustrative purposes only. It should not be construed as a testimonial.  Each client’s situation and circumstances are different, and the foregoing should not be relied upon as legal or financial advice for one’s individual circumstances. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.