Imagine that you are set to make a large annual donation to your favorite charity — the one you’ve supported ever since receiving your very first paycheck.
But you see on the news that a hurricane has inflicted tremendous damage on a Caribbean island, the place you visited with your family as a child.
Now you’re pulled in two different directions. You want to support your favorite charity, but you also want to give aid to the victims of the hurricane’s destruction. How do you choose whom to help?
New research suggests that if you manage your charitable giving with a donor-advised fund (DAF), you’d be in a better position to help both causes. Says one DAF donor, “There are always core charities we give to, but enough is left over to be flexible with unexpected needs.”
Understanding DAFs
While you’re likely familiar with foundations and trusts, you might not have heard of one of America’s most popular giving vehicles. DAFs are charitable-giving accounts managed by a provider who handles all administrative, due diligence and reporting needs. Hundreds of thousands of individuals and families are choosing to give with a DAF because it allows them to give flexibly, confidently and sustainably — today and well into the future.
Increased giving potential
One of the key benefits that sets DAFs apart is the opportunity to invest and grow charitable assets for greater charitable impact. This allows the average DAF account to give more to charity than what was initially contributed — and sometimes much more. This is why donors are typically well-positioned to support multiple giving priorities at once.
In one case study presented in last year’s DAF report Why Giving Matters, a hypothetical individual donated $100,000 to open an account. After 15 years of granting 10% of the account’s balance each year, the account had granted more than $110,000 ($10,000 more than what the individual had initially donated) and still had more than $46,000 remaining for future granting.
Investment options vary based on the DAF provider, but the process of investing DAF funds is generally simple. For example, Vanguard Charitable, an independent charity founded by Vanguard in 1997, offers a curated list of low-cost investment options with varying levels of risk and both active and passive management options. Leading preallocated investment options at Vanguard Charitable are managed and rebalanced regularly by experts, allowing donors to focus on granting.
At Vanguard Charitable, the average weighted expense ratio is 0.04% — an industry-low rate that allows more money to be available for donor granting rather than fee erosion.
By investing funds for charitable growth, more dollars can go to nonprofits over time.
Appreciated securities donations and reduced tax liability
Rather than limiting potential donations to cash, a DAF also allows you to more easily donate appreciated securities, such as stocks or mutual fund shares. This not only increases your options for potential charitable donations but also is a smart strategy for reducing taxable income and capital gains taxes.
Donating appreciated assets directly into a DAF means that recipient charities are relieved of having to handle the liquidation process themselves, as the administrative efforts are placed on the DAF provider. The charity simply receives a check or ACH grant payment — much simpler and faster to both process and put to use toward its mission.
When appreciated assets are donated directly into a DAF, the donor generally won’t need to pay capital gains taxes on that asset. (Speak with your tax adviser for more details on your specific tax situation). Additionally, any contribution to a DAF is immediately tax-deductible for the donor. This can be a crucial piece of any tax strategy as you look to reduce your taxable income and even lower your income tax bracket.
Strategic, complex philanthropy simplified
Partnering with a DAF provider means having access to an expert who performs rigorous due diligence for your grants while also handling the administrative needs related to granting. Top providers like Vanguard Charitable own the responsibility of most reporting requirements. Providers may also offer charitable-giving resources that help you discover new charities and learn how you can expand the impact of your giving.
Donor-advised funds are often compared to private foundations, and some donors elect to choose between the two giving vehicles. However, many donors with private foundations also open DAF accounts so they can receive expert support at a lower cost while still maintaining their foundations. And for donors without a private foundation, a DAF provides many of the same benefits — such as charitable investing, granting and help with illiquid asset donations — while most of the administrative requirements fall to the DAF provider rather than the donor.
Should you consider a DAF?
For those who give to charity regularly and would like to give more, a DAF is an excellent way to increase giving potential over time. It means that you can take a both-and approach to charity, rather than either-or. You can give to your long-standing favorite charity and in response to the latest natural disaster or another unexpected development.
And if you are looking to reduce your tax liability by reducing capital gains taxes and your taxable income, a DAF gives you numerous benefits while supporting you in making a meaningful impact on the causes you care about.