Americans are very generous with donations to charities. If a person is donating to multiple charities, gathering the documents for these contributions for tax reporting can be time consuming and inefficient. Donor Advised Funds (DAF) can make it easier to donate to all your favorite charities and potentially achieve some tax savings. Learn about how Donor Advised Funds can work for you.
In this blog, we will discuss the key elements of a Donor Advised Fund (DAF)
- Americans are Generous People
- How a Donor Advised Fund Works
- Establishing a Donor Advised Fund
- Contributing to a Donor Advised Fund
- Managing Investments in Your Donor Advised Fund
- Granting to Your Favorite Charities with a Donor Advised Fund
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Americans are Generous People
Charities in the United States rely on the generosity of Americans for much of their funding and Americans are some of the most generous people in the world.1
Here are some key facts about charitable giving:
- Charitable giving by individuals has grown 5 of the last 6 years
- Americans gave $471 billion in 2020 – 5% increase from 2019
- Corporate giving in 2020 decreased to $16 billion – 6% decrease from 2019
- Foundation giving in 2020 increased by $88 billion – 19% increase from 2019
- In 2020, the largest source of charitable giving came from individuals, at $324 billion, or 69% of total giving
- In 2020, charitable dollars were given to groups as follows: religion 28%, education 15%, human services 14%, grantmaking foundations 12% and public service societies 10%
- 74% of millennials agreed when asked, “Do you consider yourself a philanthropist?” and shared that they consider giving a responsibility and that it allows them to live a life that reflects their values
Source: Fidelity Charitable
Our clients often donate to several different charities. Sometimes the donations are one-time lump sums, and other times donations can be made over time. When it is time to prepare taxes, collecting all the documentation for these donations can be tedious and time consuming. There is a way to make this easier, with a Donor Advised fund. Let’s explain how they work.
How a Donor Advised Fund Works
A Donor Advised Fund allows you to set aside money you plan to donate to one or more charitable organizations. An advantage of using a DAF is you get a tax deduction immediately, but you can take your time to research and then donate to the charities you want to support.
In fact, you can donate to your DAF, several years’ worth of contributions to maximize your tax benefit, then grant to the charities you designate in the same year, or over a number of years.
3 Steps for Using a Donor Advised Fund:
- Give – Make a contribution to your Donor Advised Fund and receive an immediate tax deduction for the full amount
- Grow – Select from a range of conservative to aggressive investments in your Donor Advised Fund
- Grant – Donate to a range of charities, including the same charities you’ve been using currently, as a lump sum or monthly donation
We work with the Donor Advised Fund from Fidelity Charitable which is a 501(c)(3) public charity, established in 1991, and has distributed $51 billion to charities since its’ inception. Fidelity Charitable supports more than 328,000 IRS-qualified organizations, in every state and around the world.
A Donor Advised Fund with Fidelity Charitable is independent of Financial Journey Partners. At the time of this article, their annual Administrative Fee is 0.6%, for accounts under $500,000. There are also Investment Fees to consider that vary based on the types of investments you choose. We encourage you to learn more about all aspects of their program at: www.fidelitycharitable.org.
Establishing Your Personal Donor Advised Fund
First, determine the name of your giving fund, such as the “Smith Family Giving Fund”. Next follow the instructions to “Open a Giving Account” on the Fidelity Charitable website.
We recommend clients schedule a time to walk through the process with their Wealth Manager so they can see and assist with your Donor Advised Fund. There is an online form we will ask you to sign and complete. After the account is opened, we recommend our clients link their Donor Advised Fund in their Client Portal.
Contributing to a Donor Advised Fund
Now that the account is opened, the next step is to transfer an asset to your DAF account. A DAF account can be funded with cash, stocks, ETFs and/or mutual funds. FJP will want to collaborate with your tax person as we coordinate this asset transfer with you.
We recommend transferring assets that have a gain that you’ve owned for more than 365 days and that you consider using your most highly appreciated assets. Assets transferred for charitable donation are not subject to capital gains tax on the transaction, so higher gains may equal higher tax savings.
If the assets are coming from an account at Fidelity, you can see your account and the positions inside the Fidelity Charitable website, making it easy to select and transfer a specific asset. You even have the option to select the specific lot of a stock or fund, to pinpoint the highly appreciated shares.
Your Donor Advised Fund can be funded with assets from other financial companies or those at Fidelity managed by FJP. Let’s be sure to coordinate donations from accounts you hold with FJP, so we don’t trade something you are about to donate.
Managing Investments in Your Donor Advised Fund
In a Donor Advised Fund from Fidelity Charitable, there are a range of options for investments, from conservative to aggressive. As the fund owner, you can select the investments to fit your risk tolerance and time horizon.
You can make a large donation to frontload the account and get all the tax deduction at the time of this donation. You can also make periodic asset transfers throughout the year as you evaluate your personal goals and tax situation.
A Donor Advised Fund with Fidelity Charitable is managed by them, not by your Financial Journey Partners’ Wealth Manager, however as your personal financial advisor we are interested in all of your financial goals as part of our relationship with you.
Granting to Your Favorite Charities with a Donor Advised Fund
With your Donor Advised Fund, you can select the charities that are important to you and grant specific amounts to each. You can choose how you want to donate to each charity: a lump sum, one-time contribution, annual contributions, or monthly contributions. You can go onto the website to setup the donations or make changes as you desire.
A DAF can be an opportunity to involve the entire family in the giving process and to leave a legacy. If you are interested in establishing a Donor Advised Fund, contact your Wealth Manager. We can discuss how this could fit into your financial plan and when you are ready, we can help you set up your new fund.
Other Resources to assist with charitable giving and tax strategies:
Financial Journey Partners is Here to Help You
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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References:
1 Giving USA 2021 Annual Report
2 Fidelity Charitable
Financial Journey Partners, nor any of its members, are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.
This is being provided for informational purposes only and should not be construed as a recommendation to engage Fidelity Charitable. The views expressed do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Investment advisory services are offered through Mutual Advisors, LLC DBA Financial Journey Partners, a SEC registered investment adviser.