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Help Maximize Your Giving Impact and Tax Benefits with Donor-Advised Funds

Renée Pichette, CFP®

Wealth Advisor

Summary

Increase your philanthropic power with a donor-advised fund. Learn more about this simple, tax-efficient investment option.

Maximize Your Giving Impact and Tax Benefits with Donor-Advised Funds Image

If you’re intrigued by the idea of investing in a donor-advised fund (DAF), you’re not alone. Due to their simplicity and flexibility, DAFs are among the fastest-growing charitable giving vehicles in the U.S. among all Americans, not just the wealthy. At their core, DAFs are investment accounts that can only be used for charitable giving. While the money in the fund is owned and managed by a financial firm, DAF donors still have a say in how and to which nonprofits the assets are distributed.

A simple, flexible, and tax-advantaged way to give to your favorite charities

Community foundations and Jewish federations were among the first to offer DAFs in the 1930s. And in the ensuing years, DAFs have become increasingly popular ways for individuals and families to support charitable causes. According to the 2024 National Study on Donor Advised Funds, nearly half of all DAFs (49%) had total assets at the end of 2021 of less than $50,000 with contribution amounts ranging from $10,000 to $49,000 – making DAFs a mid-range philanthropic vehicle.1 And although total charitable giving in the U.S. declined in 2022, DAF donors continued to support charities and causes important to them. Both DAF contributions and grants saw 9% growth, amounting to a new high of $52.16 billion grant dollars.2

Donors take tax deductions, avoid capital gains

When you contribute cash, securities, or other assets to a DAF, you are generally eligible to take an immediate tax deduction. Those funds can be invested for tax-free growth, and you can recommend grants to any eligible IRS-qualified public charity. A DAF is easy to set up and maintain, with just three simple steps:

  • Make a tax-deductible contribution. Easily donate cash, appreciated stock, or non-publicly traded assets to your DAF, which is maintained and operated by a section 501(c)(3) sponsoring organization.
  • Grow your donation, tax free. Your donation can potentially grow, making more money available for giving. Most sponsoring organizations have a variety of investment options based on your projected time horizon.
  • Grant when you’re ready. You can support public charities, causes, or initiatives that align with your passions or meet emerging needs through grant recommendations from your DAF. The public charity sponsoring your account will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and are used for charitable purposes. If privacy is a concern, you can give anonymously. DAF sponsors handle all due diligence and reporting, eliminating the need for you to maintain records of annual donations.

DAFs offer tax advantages to all donors

Because DAFs aren’t required to annually distribute a percentage of assets, they have been particularly attractive to high-net-worth individuals. However, DAFs extend the opportunity for tax advantages to all donors. Assets put into a DAF today can potentially grow in value and earn interest and investment dividends into the future with no tax consequences while helping to increase your dollars for making charitable contributions. As soon as you make a charitable DAF contribution, you are eligible for an immediate tax deduction. Although some limits do apply:

  • If you donate cash, via check or wire transfer, you’re generally eligible for an income tax deduction of up to 60% of your adjusted gross income.
  • Donating long-term appreciated securities directly to charity – instead of liquidating the asset and donating the proceeds – can help maximize your tax benefit and the overall amount you grant to charity. You also are

eligible for an income tax deduction of the full fair-market value of the asset, up to 30% of your adjusted gross income. By donating appreciated stock directly to your DAF, you can potentially eliminate capital gains tax on those appreciated assets, provided they’ve been held for more than a year.

  • Consider “bunching” donations you’d typically make over a period of time in a single instance or installment. This strategy can help allow you to maximize your itemized deductions in one year and is especially effective if you’re on the cusp of itemizing deductions.

A popular choice for retirees and during years when income is higher than usual

DAFs are an attractive option for anyone who practices charitable giving, but there are several benefits that may make them a wise choice for those nearing retirement. For instance, if you’re in your peak earning years, gifting highly appreciated stock to a DAF may provide a tax deduction while avoiding capital gains. In addition, when you’ve set money aside in your DAF during your working years, some – or maybe even all – of your charitable giving can continue without any new funding.

Pass on the spirit of philanthropy – and the means to carry it out – to the next generation

As you contemplate your estate planning, you may want to recognize and give to some charitable organizations or philanthropic causes that have made an impact on your life. And you may want to encourage the beneficiaries of your estate to continue the legacy of charitable giving that you have maintained during your lifetime. A DAF provides a convenient way to continue a legacy of charitable giving while helping to ensure a smooth transition of wealth.

For more information on how a DAF might align with your philanthropic, retirement, and estate planning goals, contact your wealth advisor. If you’re not already a Mercer Advisors client, let’s talk.

 

1 The Donor Advised Fund Research Collaborative. “The 2024 National Study on Donor Advised Funds.” DAF Research Collaborative.

2 National Philanthropic Trust. “The 2023 DAF Report.” NPTrust, 7 December 2023.

 

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

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