Why You Should Consider Establishing a Donor-Advised Fund Before You Retire

Picture of Scott Hohman, CFP®, AIF®

Scott Hohman, CFP®, AIF®

A Strategy to Maintain Your Charitable Giving and Maximize Your Tax Deductions

If charitable giving is important to you, it may be wise to consider establishing a donor-advised fund (DAF) before you retire. Doing so means you can continue to support the organizations and causes that are meaningful to you even when your employment status changes. Plus, a DAF can help you maximize your tax deductions in retirement, too. Is it the right vehicle for you? Read on to learn more.

What is a Donor-Advised Fund?

You can think of a DAF like a charitable investment account, specifically created to allow you to support non-profit organizations. It is administered by a public charity, and it manages donations on your behalf. You can contribute cash, securities, or other assets to your DAF, and the funds can be invested for tax-free growth. Then, you can recommend that the DAF make charitable grants to virtually any organization with 501(c)(3) status.

I have personally seen growth in the popularity of donor-advised funds over the last decade, but they have truly exploded in use since the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). This legislation made several significant changes to income tax law, including nearly doubling the standard deduction and placing new limitations on itemized deductions. It was a blow to high earners, especially those living in states with high income and property taxes. According to the National Philanthropic Trust Report for 2021, since the passage of the TCJA, 13% of individual giving happens through DAFs.

How to Use a DAF

Many local foundations offer donor-advised funds, and most brokers do, too. There are just a few simple steps for using one:

  • Reach out to a foundation or broker you’d like to open a DAF with and ask about their minimum donations.
  • When you find one that you’re comfortable with, transfer cash, securities, or other assets into the DAF. (This can usually be done online.)
  • Choose how you’d like your funds invested until they are donated to charity. Your DAF will likely offer a mix of asset types for you to select from.
  • On whatever schedule works for you, request that a donation be sent to one or more charities of your choosing, and at the amount of your choosing (as long as it meets the required minimum donation for the DAF).

As you can see, it’s a fairly straightforward process!

SEE ALSO: Qualified Charitable Distributions: What They Are and Why They Matter

Critical Details to Know

There will be rules related to your donor-advised fund, both from the IRS and from the account sponsor, and you should know them so that you can be sure you’re qualifying for any potential benefits.

For instance:

  • You will be eligible for a tax deduction in the year you contribute to the DAF, regardless of when you send funds to a charity. This rule will likely play a significant role as you determine your strategy for utilizing a DAF. (For instance, donating in your peak earning years will allow you to get maximum benefit from the tax deduction.)
  • Any donated stock is given a fair market value that is determined by averaging the highest and lowest price of said stock on the day it lands in your DAF account. That fair market value is important because it’s the value you will be able to claim when you itemize your deductions if you have owned the stock more than one year. (If you’ve owned the stock less than one year the tax deduction may be your cost basis instead of fair market value.)
  • There are limits to the amount you can deduct in any given year, and they will be based on your taxable income and the type of asset donated. (Excess donations can be claimed later, however.)

Given that there are important details and regulations to consider, working with a financial advisor on your DAF charitable giving strategy may be wise.

The Benefits of Giving Through a Donor-Advised Fund

Every donor’s personal situation is unique, but there are a few common benefits to using a DAF that draw many people in:

  • You’ll claim your deduction on your own schedule, by choosing the tax year in which you transfer the funds, and it does not necessarily have to line up with when you want to support the charitable organization.
  • You can “stack” your DAF contributions to maximize your tax benefit one year, then take advantage of the higher standard deduction created by the TCJA in your non-contribution years.
  • If you want to donate stock, it’s far easier to do so with a DAF, since many non-profit organizations are only equipped to accept cash.
  • If you prefer to practice your philanthropy without fanfare, many DAFs allow you to send donations anonymously.
  • Many DAF sponsors allow you to name a successor to manage your account once you’re gone. So, you can pass on a spirit of philanthropy – and the means to carry it out – to the next generation.

It’s clear that utilizing a donor-advised fund comes with value on multiple fronts.

SEE ALSO: Tax-Savvy Charitable Giving Strategies

Why Should a Retiree Use a DAF?

The above benefits may be attractive to anyone who practices charitable giving, but there are several benefits that have particular value for retirees – and why I recommend setting up a DAF before you retire:

  • Let’s say you know that your marginal tax rate will drop after you retire; funding your DAF before that happens will provide you with a greater tax benefit.
  • You can improve your post-retirement cashflow, too; when you’ve already set the money aside in your DAF, some (maybe even all!) of your charitable giving can continue without any new funding.
  • You can strategize to pre-fund your DAF to a level that will allow your future giving to remain at a certain level, or even to grow in order to keep up with inflation.

As with any part of your retirement planning, how you want to utilize a donor-advised fund requires some forethought – and much of it hinges on your particular circumstances and goals. For instance, I recently helped a client gift highly appreciated stock to her DAF in her peak earning years. She enjoyed a tax deduction while in a higher tax bracket than she’ll be in once she retires, she avoided the capital gains, and she was able to pre-fund her charitable giving for years to come, too.

Think Establishing a Donor-Advised Fund May Be Right for You?

If you’d like help determining whether a DAF is right for you – and what strategy makes the most sense for your charitable giving and tax planning goals – contact us today. At Resolute, we are committed to helping our clients support the causes and organizations they care about and make a significant impact with their wealth. We look forward to hearing from you!

The views expressed represent the opinion of Resolute Wealth Advisor, Inc. (RWA). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RWA believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the RWA’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

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