Rapid City financial advisor Kahler explains why giving via donor-advised funds is not just for the wealthy
The first time I heard of a Donor-Advised Fund (DAF), I imagined a complex, high-maintenance charitable fund that would cost an arm and a leg to establish and maintain. I was mistaken. You don’t need a fortune to channel your giving through a DAF. These funds are designed for everyday people who want to make charitable donations in a way that offers tax efficiency, flexibility, and choices.
A DAF is essentially a personal charitable savings account that is maintained on your behalf by an established public charity. You can deposit cash, stock, or other assets into the account, receive a current-year tax deduction, and distribute those dollars to your favorite charities over time. Here’s why DAFs are so appealing:
Tax advantages:
With Congress increasing the standard deduction in 2017, many donors found that their charitable contributions no longer provided a tax benefit. Giving through a DAF allows you to bunch multiple years of contributions into a single year, so the donations plus other deductions exceed the standard deduction. This restores much of the tax benefits of your charitable giving.
A DAF also simplifies your tax record-keeping. You make one gift to the fund and only have to provide one donation receipt to the IRS. Then you can direct the fund manager to distribute your gifts to as many charities as you choose to support.
DAFs also allow donors to donate appreciated securities and avoid capital gains taxes, making more money available for charity.
Flexibility:
If you give several years’ worth of donations to the DAF at once, those funds can then be distributed any time. This allows you to maintain a steady level of annual giving that charities can count on. You can give anonymously and can easily make changes in your giving. You also have time to research new charities before you decide to support them.
Estate planning convenience:
Instead of naming specific charities, you can designate the DAF in your will or trust as a beneficiary. If you want to exclude or include a charity in the future, all that’s required is a simple amendment to your giving plan with the DAF rather than rewriting or amending your estate planning documents.
If you would like to set aside a sum of money for a charity that can generate an annual income in perpetuity, but establishing a foundation or charitable trust is impractical, you can make such a long-term gift through a DAF.
Given the growing popularity of DAFs, the IRS has proposed new regulations to address potential abuses and ensure these funds are used as intended. The regulations would clarify the definition of a DAF, making it clear that any fund where a donor retains advisory privileges over the distribution or investment of the assets falls under this category.
The new rules also define taxable distributions more clearly. Any use of DAF assets that provides more than an incidental benefit to the donor or related parties will be taxed, and penalties for improper distributions will be 20%.
The minimum amount to establish a DAF varies; it is typically around $10,000. The National Philanthropic Trust lists 1,151 charitable organizations that sponsor DAFs, so finding one should not be a problem. One in my community, for example, is the Black Hills Community Foundation (its logo is shown above).
A DAF is not only a tool for the ultra-wealthy. It can be a versatile and accessible option for anyone looking to make a charitable impact. Establishing a fund is almost as simple as opening a personal savings account. A donor-advised fund is not about complexity or exclusivity. It is about providing flexibility, tax benefits, and efficiency that can support your giving philosophy and make philanthropy work for you.
Rick Kahler, CFP, is a fee-only financial planner and financial therapist with a nationwide practice, Kahler Financial Group, based in Rapid City. His co-authored books include “Coupleship Inc.” and “The Financial Wisdom of Ebenezer Scrooge.”
