Rethinking Donor-Advised Funds: Impactful Charitable Contribution & Tax Benefits

When it comes to charitable giving, donor-advised funds (DAFs) have emerged as one of the most flexible and tax-efficient tools available, especially for high-net-worth individuals and retirees.

But if you think a DAF is just a fancy way to write a big check to your favorite charity, you might be missing the bigger picture. Let’s clear up some of the misconceptions and common errors people make with DAFs, so you can maximize the impact of your charitable giving.

Quick Overview of How a DAF Works

A donor-advised fund is essentially a charitable investment account that allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to your favorite charities over time. The key benefit is that you can contribute to the fund and claim a deduction in the year the contribution is made, even if you don’t distribute the funds to charities until later. The funds within the DAF can grow tax-free, and you can strategically decide when and how much to donate to various causes.

For a deeper understanding, review our guide to what donor-advised funds are and how they work, which also looks at multiple important advantages of DAFs.

Common Misconceptions About DAFs

1. Gifting Cash Is the Best Option

Many people fund their DAF using cash. While this is certainly straightforward, it’s not always the most tax-efficient way to donate to charity.

Instead of cash, consider donating appreciated assets, such as stocks, bonds, or real estate, that have been held for longer than a year.

When you donate long-term appreciated assets, the tax benefits are twofold:

1. You can deduct the full value of the contribution
2. You avoid capital gains tax on an asset sale

Glassman Wealth Pro Tip: Let’s say you would rather donate cash because you don’t want to part with a particular stock that has appreciated over time. Instead, you can donate the stock and repurchase the same number of shares using cash. By doing so, you’ve just increased your stock’s cost basis.

Explore more smart ways to maximize your charitable donations and tax deductions:

• Smart Charitable Contribution Strategies for Standard Deductions
• Tax-Smart Ways to Give to a Charity

2. Leaving Money to Charity in Your Will Is Enough

Many people plan to leave a portion of their estate to charity through their will or trust. While this is a noble gesture, it can often lead to additional attorney fees to change your will or trust in the future. Instead, consider designating your DAF account as a beneficiary. By doing so, you can allow your heirs to continue your charitable legacy in a more flexible manner long after your passing.

Glassman Wealth Pro Tip: Consider naming your DAF account as a beneficiary of a pre-tax retirement account, like an IRA or 401(k), rather than a beneficiary of your other assets. This allows you to fulfill your charitable intentions while escaping income tax that your heirs would otherwise pay. Other types of accounts, like a brokerage account or trust, will typically receive a step-up in cost basis after your passing and are more tax-efficient to inherit than an IRA. For more, check out Your Guide to the Donor-Advised Fund: A Powerful Tool for Charitable Giving.

3. You Should Donate the Same Amount Each Year

It’s easy to fall into the habit of making the same donations each year. But this can cost you more in taxes over time than a larger, lump-sum contribution to your DAF. By adding more into the DAF up front, you can take advantage of charitable lumping, where you “lump” several years’ worth of charitable contributions into one tax year. Depending on your tax situation, this can allow you to itemize your tax deductions in the year of the contribution while taking the standard deduction in other years.

Glassman Wealth Pro Tip: Front-loading your DAF contributions can be especially beneficial in years when your income is higher than usual, such as when you sell a business, receive a large bonus, or convert a traditional IRA to a Roth IRA.

Charitable lumping, or bunching, is only one of the key considerations for using a DAF. In this article we look at this and other powerful reasons DAFs are perfect for maximizing your charitable donations and tax deductions.

Make the most of your tax benefits—learn Why Your Financial Advisor Should Be Reviewing Your Tax Return.

The Bigger Picture: Benefiting Your Causes and Financial Plan

A donor-advised fund isn’t just a tax-saving tool; it’s a way to plan your giving thoughtfully and strategically. By avoiding common mistakes and misconceptions, you can make your charitable dollars go further, benefiting both your favorite causes and your overall financial plan.

Next time you think about your DAF, remember that it’s not just a place to park your charitable dollars. It’s a powerful tool that, when used correctly, can amplify your impact and optimize your tax situation. Remember to regularly review your DAF strategy with your financial advisor and CPA. Tax laws change, and so do your financial circumstances. Keeping your charitable giving strategy updated ensures you’re always making the most of your donations.

Learn how Glassman can help you with DAFs. To get started, please fill out this contact form.

Explore how to make the most of your charitable donations and DAF:

• Your Guide to the Donor-Advised Fund: A Powerful Tool for Charitable Giving
• Choosing the Right Donor-Advised Fund for High-Net-Worth Individuals
• How DAFs Can Maximize Charitable Donations & Tax Deductions
• Qualified Charitable Distributions from IRAs vs. Donor-Advised Funds