Five Donor-Advised Fund Strategies To Maximize The Benefits Of Your Charitable Giving

April 2018
Tax Individual

How can you gain the maximum tax benefit from charitable giving on a simple cost-effective basis that allows convenient flexibility? Below we discuss how to maximize tax savings, as well as the benefit to charity, using a donor-advised fund (DAF). 

Donor-advised funds are a rapidly growing philanthropic giving vehicle administered by a charitable sponsor. Doctors can establish their DAFs with tax-deductible contributions now, and then later recommend grants from those funds to the charities of their choice over time. 

DAFs provide simplicity,  allowing  doctors  to  make gifts to a single entity from which they can make later grants out to multiple charities. Schwab Charitable is the most cost-effective provider, allowing doctors to open up an account with as little as a $5,000 initial contribution, and make future charitable grants of as little as $50 each. 

When you transfer assets into a donor-advised fund, you'll receive an immediate charitable income tax deduction equal to the fair market value of the assets gifted at the date made, while any appreciation goes untaxed. As a result, it's best to fund your DAF with stocks, mutual funds, and ETFs that have appreciated in value. Once established, you have the right to recommend grants out of your DAF fund to your favorite charitable causes now or at a later date. In the meantime, your funds can be invested and grow tax-free, allowing you to give more to your charities in the future. 

Below are 5 strategies to get the most from your DAF: 

  1. Accumulate funds for future gifts – You may want to receive a charitable contribution today, but are unclear as to when, and in what amount, you want to make contributions to charities. Donor-advised funds allow you to make the contribution now and receive the tax benefit, while delaying grants out to charities. This gives you the time to determine which charities you would like to benefit, and in what amounts. Moreover, it also allows you to accumulate funds over time in order to make a major gift to your church, synagogue, dental school, residency program, or other charity.
  2. Pre-fund contributions in high tax years – We recommend that you make large charitable contributions into the donor-advised fund in the year of your practice sale, when your tax liability will be highest. Thus, you can pre-fund grants to be distributed in future years when you are retired and presumably in a lower tax bracket. Thus, while the total amount gifted to charity over time may not change, the tax-deductible contributions to the DAF are made during your highest tax year, providing the maximum tax savings.
  3. Facilitate estate planning to avoid taxes – You have spent most of your career trying to accumulate wealth. Once you’ve reached your goal, your focus must change. One common estate planning goal is to provide for your family, while eliminating federal and state death taxes. This can easily be accomplished by leaving a set amount to your family under your will, with the balance contributed into the donor-advised fund. As long as the amounts passing to the family do not exceed $11,180,000 per spouse (the new estate tax exemption), this strategy will be effective to eliminate estate taxes for your family.
  4. Update succession plans on a cost-effective basis – You may wish to change the specific charities, and the dollar amounts, you wish to leave to them after your estate planning is finalized. If you don't use a DAF, but have named the charities in your will, you must go to the time and expense of modifying your will each time you change your mind. Alternatively, if all amounts are being left to a donor-advised fund, no change to the will is required. You can simply change the charities and/or dollar amounts/percentages given under your donor-advised fund and leave your will unchanged.
  5. Get your children involved – We recently recommended that you teach your children the joy of giving. If you have a donor-advised fund, you can easily do this by naming your adult children as successor advisors on your account. As account advisors, they can help make investment choices and recommend future gifts to charities. Depending on how much your children’s passions vary, and how well they get along, it may make sense to split your account into separate accounts of equal amounts for each child at your death, to provide maximum flexibility.

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