Our clients, George and Kate, are busy raising their three elementary-school-age children and renovating a home in California. George was on the ground floor of a tech start-up bought by a larger, publicly traded company. Nearly ten years later, he continues to work there as an executive. Almost half his compensation is in equity grants (restricted stock units, or RSUs) that vest over a few years. In addition to managing their investments and a concentrated stock position, our firm stepped in to work with their tax advisors and ease their 50.3% income tax rate (37% federal and 13.3% state) using a donor-advised fund.
Donations to their donor-advised fund allow George and Kate to manifest their desire to make an impact and, more importantly, focus on their kids while conveniently choosing to decide later on the charities to whom they want to give.
So, What Exactly Is a Donor-Advised Fund?
A donor-advised fund (DAF) is a charitable investment account created solely to support the causes you care about most. You contribute cash, stocks, or other assets while getting an immediate tax deduction. But don’t rush to spend it all at once; those funds can be invested for tax-free growth. This means you can make your charitable dollars go even further over time.
Think of it as planting a tree that grows money. You decide when and where to harvest the fruit by recommending grants to your favorite charities whenever you’re ready.
So, How Does It Work?
Setting up a DAF is like opening an exclusive bank account, but instead of stashing away your cash for a rainy day, you’re gearing up to make the world a better place. Here’s how it breaks down:
- Contribute: You make an irrevocable donation of assets to a sponsoring organization – think community foundations or financial institutions. These assets could be cash, stocks, or even real estate.
- Tax Perks: As soon as the donation is made, you get a nifty tax receipt. It’s like instant karma but for your taxes.
- Grow: The sponsoring organization invests the funds, and they grow tax-free. It’s like your money is at a health spa, getting all buffed up.
- Advise: You get to recommend which charities should get grants from your fund. You maintain advisory privileges over the disbursements and the investment strategy.
- Donate: Once approved, your chosen charity will receive the funds. The best part? You can support any 501(c)(3) organization.
The Benefits of Donor-Advised Funds – Why Everyone Wants In
There’s a reason DAFs are the fastest-growing charitable giving vehicle in the United States. They’re versatile, efficient, and packed with benefits.
- Strategic Giving: Spread your donations over time and be strategic about your charitable impact.
- Family Affair: Keep the spirit of giving alive across generations by involving your family in philanthropic decisions.
- Immediate Tax Benefits: Enjoy tax deductions now and decide on donations later.
- Consolidation: Streamline all your charitable contributions into one fund. It’s like tidying up your financial closet.
- Maximize Deductions: By bunching your donations once every few years into a donor-advised fund, you can exceed the standard deduction ($14,600 for single filers, $29,200 for married filing jointly in 2024) and itemize.
Looking for a second opinion?
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We understand the unique challenges and opportunities faced by affluent individuals and families. That's why we offer a no-obligation call with one of our private wealth advisors.
But Wait, There’s a Catch
Donor-advised funds charge an administrative fee for recordkeeping and administrative duties, which can range from 0.25% to more than 2%. Some donor-advised funds restrict the charities you donate to or have rules around minimum account balances. Our firm regularly conducts marketplace due diligence to survey the menu of DAFs so we can ensure every client gets the best match.
The Bottom Line on Donor-Advised Funds
DAFs offer a unique blend of immediate tax benefits, strategic giving, and long-term growth, making them an attractive option for many. They’re not just about giving money away; they’re about giving it away smartly. Despite some drawbacks, their flexibility and growth opportunities make DAFs a powerful tool in the arsenal of modern charitable giving.
At Hill Island Financial, we prioritize personalized financial strategies, focusing on relationships over transactions. Our experienced advisors help you navigate complex wealth management issues, offering custom solutions to maximize charitable impact, influence political processes, or secure your legacy. Contact us today to start your journey towards a secure and impactful financial future.
