Knowing What Counts Podcast

Money & Meaning: Unlocking Donor Advised Funds

• Tim Provost, CPA • Episode 8

Share episode

Send us a text

Donor Advised Funds: The Basics and More

Charitable giving becomes truly powerful when strategy meets generosity. Tax Director Lisa Behan from MP CPAs joins us to unpack the often-overlooked financial tool that's changing how smart philanthropists approach their giving: Donor Advised Funds (DAFs).

The conversation dives deep into strategic approaches that can dramatically increase the power of your giving. Lisa shares brilliant tactics like "bunching" multiple years of charitable contributions into high-income years, contributing appreciated assets to avoid capital gains tax, and navigating the post-2018 tax landscape where standard deductions have changed the game for many givers. Whether you're facing a windfall year from a business sale or simply want your regular charitable giving to have a greater impact, these strategies could save you thousands while increasing what reaches your favorite causes.

Ready to transform your giving from reactive checkbook charity to strategic philanthropy? This episode provides the roadmap you've been looking for.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with Knowing what Counts.

Speaker 2:

Because success begins with knowing what counts, want to make a lasting impact with your charitable giving while maximizing tax benefits. In this episode of Knowing what Counts podcast, the experts at MPCPAs break down donor advised funds and how they work, their advantages and how they fit into a strategic financial plan. Whether you're a seasoned philanthropist or just exploring your options, we've got the insights you need to give smarter. Welcome back everyone. I'm Sofia Yvette, co-host, slash producer. I'm back in the studio with Lisa Bien, director at MPCPAs. Lisa, how's it going today? Hi, sophia, it's going well, great. So, lisa, go ahead and introduce yourself to our listeners.

Speaker 3:

Okay, well, I'm really happy to be here today having this conversation with you. As you said, I'm a tax director here at MPCPAs. I've been with the firm for eight years, but my career as a tax professional has spanned multiple decades. I don't want to say how many, but it is an even number and it's not two, so you can figure that out yourself. I work with high net worth individuals and families, helping them with income and estate tax planning. Individuals and families helping them with income and estate tax planning, often among or across multiple generations. We look at impact, investing and philanthropy, which is a really good segue into the topic today.

Speaker 2:

So, lisa, what is a donor advised fund and how does it work?

Speaker 3:

A donor advised fund, or a DAF as we'll call it, is a vehicle for charitable giving. I think of it sometimes as a piggy bank or a savings account for charitable giving. So a donor would contribute or deposit funds into a donor advised fund. They can sit there and grow and then, at their pleasure or where there's a need, they withdraw the funds as a distribution or grant to a donee organization.

Speaker 2:

Well, that sounds like a beautiful concept, Lisa. How does someone set up a donor advised fund?

Speaker 3:

So donor advised funds are set up through sponsoring organizations such as a financial institution or a community foundation. Typically, the minimum amount required to set up a donor advice fund is a $5,000 contribution. There are no income limits, minimums, maximums. Anybody of any income level can create a donor advice fund, but your first stop in doing it is with a sponsoring organization.

Speaker 2:

Is there a timeline for distributing the funds from a donor advised fund?

Speaker 3:

There isn't a timeline, sophia. You know the funds can sit there and grow, once they're contributed, for months, years, even decade. Sponsoring organizations will encourage grant making, though, because the purpose of a donor advised fund isn't to just send it and forget it. It's to have an impact on a charitable organization's missions. So, while there are no set timelines, the idea is to have a plan for how the funds are going to be used to benefit public causes.

Speaker 2:

And what are the tax advantages of creating a donor-advised fund?

Speaker 3:

Well, the first thing I'll say before we start talking about tax advantages is that a donor-advised fund shouldn't be created without a donative or philanthropic intent. Once funds are contributed to a donor advised fund, they can't be taken back by the donor and they can't be used to benefit the donor. So while there are some tax benefits we'll discuss if someone's not interested in giving away assets, they shouldn't create a donor advised fund because there's no gimmick here. Once the funds go into the donor advised fund, they're gonna go to charity at some point. Contributions to a donor advised fund are tax deductible in the year they're contributed to the DAF. When the funds are distributed as grants, there is no tax deduction to the donor because they already took a tax deduction in the year of the contribution.

Speaker 3:

There are income-based limitations on the tax deduction associated with a contribution to a death. It's sort of technical, but a charitable contribution of really of any kind but we're talking about deaths today cannot wipe out your entire income so that you have no tax deduction on the basis of the charitable contribution. There are a percentage of income limitations on the deduction for the DAF contribution that are a little bit technical and a tax professional could guide you through those rules the balances in the DAF are invested for earnings and growth but that is not taxed to the donor. So the fund can grow over time and the donor has more to give away, but that doesn't cost the donor anymore. So it's just the value. The time value of the fund sitting there growing is really what is the power behind a death.

Speaker 2:

What types of assets can be contributed to a donor advised fund?

Speaker 3:

There is a variety of types of assets that can be contributed to ADAPT. Commonly, what we see is cash, securities. Real property can be contributed, even cryptocurrency. Donations of real property are a little more complicated because they involve valuing real estate and deed transfers, so that's not as easy as cash or securities. One caution I'd like to throw out is that qualified distributions from IRAs that's, a certain type of distribution that comes from an IRA and goes directly to charity, which is a tax-efficient method of giving Maybe that's for another podcast but those qualified charitable distributions cannot be contributed to a death.

Speaker 2:

How much control does a donor have over the funds in the donor advised fund?

Speaker 3:

As the name implies, in a donor advised fund or a death, the donor can advise or recommend the grants from the death. The donor can advise or recommend the grants from the debt. So if there is a charitable organization that the donor would like to support, they go to the sponsoring organization and request or recommend a grant to that organization. The sponsoring organization has final approval or rejection of that recommendation within IRS guidelines. I've never seen a recommendation declined by the sponsoring organization but I suppose it could happen.

Speaker 2:

How are the funds in the donor advised fund invested?

Speaker 3:

The sponsoring organization has responsibility for that. So the sponsoring organization, whether it's a community foundation or a financial institution, will take care of investing the funds. They're typically invested in cash securities bonds, but that's an administrative piece that the sponsoring organization takes care of. They will issue reports on how the fund is doing the earnings year-over-year comparisons but the donor doesn't make those decisions. The sponsoring organization handles all of that.

Speaker 2:

So, lisa, how can a donor advice fund be used to implement tax saving strategies?

Speaker 3:

Sophia, this is really the meat of this topic. For a tax nerd like myself, the tax strategies in using DAFs really involve the timing of DAF contributions, and the one that comes to mind immediately is in a year where an individual's income is spiking for some reason over their typical level of income perhaps a large bonus, sale of a business, distribution from a non-qualified retirement plan, or maybe a lottery winning or something that is a year where they may find themselves in a higher marginal tax bracket than they're used to. The strategy when you're in a higher tax bracket is to use tax deductions against that tax bracket because they're more powerful than using them in a lower tax bracket. So if you have donative intent and you want to be philanthropic, you might consider bunching all of your charitable contributions, or several years worth, into the one year where you have the high income in order to achieve the highest benefit for the tax deduction for the charitable contribution to the death yeah, you don't remember. In a death you can make a large contribution, but perhaps you don't know where you want to spend the money in terms of what charities you want the money to go to. You could make the large contribution in the year of your high income, get the benefit of the tax deduction in the high tax year and then decide where you want those monies to go and what charities you want to support. So, again, this is a strategy around timing and when years are sort of aberrant against, it's sort of out of the normal. We think that's the first time we think of donor advised funds Along the same lines. This is sort of more general tax planning for when perhaps not when you have a spike in income. It's just using donor advised funds generally to maximize tax deductions, and this has to do with the standard deduction that individuals get versus the itemized deductions. Most people know that in 2018, starting in 2018, the standard deduction for individuals increased by a lot. The overall structure of itemized deductions changed, so we were no longer allowed to deduct all of our state and local taxes. There's a limit on that. Deductions for investment expenses or some employee deductions were eliminated. So many of us were left with really not very many deductions and we ended up using the standard deduction.

Speaker 3:

So consider someone who donates to charity $5,000 a year, say, and they don't have a mortgage. They are likely using the standard deduction. Let's say, their next door neighbor who doesn't give anything to charity and also doesn't have a mortgage is also using the standard deduction. So you can see the person who gave $5,000 to charity is getting the same tax deduction as the person who didn't. So what one could consider doing is bunching charitable contributions say five years worth all, into one year. Let's say you give away $5,000 a year, in one year you could put $25,000 into a DAF and you would be exceeding the standard deduction in that year. So you do get some benefit tax benefit for your charitable contributions. Then you'll have the DAF grant the money out over the next five years and it'll be more than $5,000 a year hopefully, because it will grow. So that's how bunching the deductions into a DAF can create some tax efficiency. In following years you'll continue to use the standard deduction. So we've seen clients every three years they've been making a large charitable donation to a DAF and then they wait a couple of years and then replenish the DAF. It's sort of a cycle that they've created.

Speaker 3:

Finally, there's a general tax strategy around DAF contributions and around charitable contributions in general, and that is using appreciated assets to fund charitable contributions. So if you use appreciated stock to contribute to a DAF, the DAF gets that value. That's the fund balance. But that appreciation or the capital gain that's embedded in that stock escapes taxation Because when you make the contribution to the DAF your tax deduction is the market value. You don't ever pay that capital gains tax. That's a more efficient tax move than selling that asset, paying the tax, having to use other money to gross that amount up to the value that you wanted to give to the charity. So that doesn't apply to DAFs. That applies to any kind of charitable giving that people want to use.

Speaker 2:

Most definitely so, Lisa. Are there any other advantages in setting up and using a donor advised fund for charitable giving that we haven't already touched on?

Speaker 3:

Two come to mind, Sophia. The first is just really around convenience of using a DAF. If you don't use a DAF and you give $1,000 away to 10 different charities every year, you're likely going on the portals of 10 different charities and hitting the give button and putting in your credit card or perhaps your old school, and you're writing checks and sticking them in the mail Using a DAF. In the same example, you could contribute $10,000 to a DAF and you go to the DAF portal and you log in and you say I want to give $1,000 to each of these 10 charities and, assuming that the sponsoring organization approves those recommendations, poof the donations are made. So that's just a matter of convenience and logistically it's a lot easier than going around giving donations, smaller donations, to lots of organizations.

Speaker 3:

The other thing that comes to mind that's not really so much a financial issue is community foundations do a lot of education on charitable giving options locally. They can be used as a tool to help you organize charitable giving around causes that you want to support. There are grant recommendations that community foundations make in all areas, whether it's food, insecurity, education, youth programming. Community foundations can be a really good resource in helping you sort of sift through the options for supporting your community. So those are two things that are just part of giving. They just make giving easier.

Speaker 2:

Love it, Lisa. We'll catch you in the next episode. Have a fantastic rest of your day. Thanks, Sophia.

Speaker 1:

Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit the mpgroupscpacom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.