Five benefits you can receive from donor-advised funds

What are the benefits of DAFs?

DAFs offer a variety of benefits for high-earning physicians looking to reduce taxes, support their favorite charities and simplify their giving strategy.

1. Tax efficiency

One of the biggest reasons wealth managers recommend DAFs involves the tax benefits they offer. Normally when you donate to a charity, the funding comes from earned income on which you have already paid taxes. Or it might come from the sale of securities, which could trigger taxes on the capital gains.

By contrast, when you contribute to a DAF using an appreciated asset, you can avoid paying capital gains on the contribution (if the asset was held for more than one year). Instead of gifting assets that would otherwise incur a tax event, you can strategically use the DAF to reduce your tax burden.

Contributions to a DAF can also be particularly beneficial for individuals with concentrated positions in company stock. Rather than trying to sell their shares and attempting to rebalance their portfolio, they could instead gift those shares to the DAF by making a tax-exempt transfer.

Your federal tax return could benefit as well. When donating securities to a DAF, your contribution could serve as a possible above-the-line tax deduction worth up to 30% of your adjusted gross income, and up to 60% when donating cash.

2. Bunching contributions

In recent years, many high net worth taxpayers have witnessed the unfortunate removal of a substantial number of itemized deductions from their Schedule A worksheets. The standard deduction was raised substantially, but unless your itemized deductions exceed the standard deduction, your charitable gifts will not help to reduce your taxable income. Many charitably inclined physicians, then, are receiving little or no tax benefit from their generous contributions. For those individuals who regularly donate to the same charities each year, bunching deductions with a DAF could help physicians exceed the standard deduction threshold amount and receive a larger tax benefit for their charitable contributions.

Instead of making individual donations over the next two to four years, you combine them into one larger DAF contribution. You will get the tax benefit of the full, larger contribution for that year, which will help your itemized deductions. In the interim years, you would then take the standard deduction. It can be particularly helpful to “bunch” in years when you anticipate that income will be higher to offset a potentially higher tax liability.

3. Tax-free growth potential

Once you contribute assets to the DAF, they will grow tax free within the fund (like a Roth IRA). Generally, the assets will be converted to a limited group of investment offerings like a 401(k). Depending on the organization, they may even be managed by a financial adviser. Ultimately, this will increase the potential for your contributions to grow in value and could lead to larger grants to charities of your choice.

4. Delayed distributions to charities

Suppose you would like to take advantage of these tax benefits or have a cause you would really like to support, but you are uncertain as to which charitable organizations are the right ones for your donations. A DAF can serve as an intermediate holding account. Large contributions can be made to your DAF all in one year and dispersed to the charities of your choice months or even years later. Meanwhile, your contributions are still tax deductible in the year they were made.

5. Less recordkeeping

Rather than making multiple donations to several charities and then trying to keep track of them, a DAF can be used to simplify the process. You only need to contribute to the DAF and then let the DAF manage the logistics of distributing your grants. To your benefit, you will receive one consolidated statement that you can easily submit to your tax professional.

How do I contribute to a DAF?

Chances are that if you are already investing with a major full-service brokerage, you will have the opportunity to contribute to a DAF. Many reputable services like Vanguard, Fidelity and Charles Schwab each have charitable arms that qualify as a section 501(c)(3) organization according to the IRS. For some of these institutions, the minimum starting amount can be as little as $5,000.

Several public and community foundations also serve as DAF sponsors. These organizations will typically cater to specific social, regional and faith-based causes.

Make the most of your charitable donations

Donating to charity is a noble act, but it can also be done in a way that is beneficial to your bottom line. After all, if you can save in taxes, you will ultimately have more wealth with which to make an impact. A DAF can be a great way to avoid paying taxable capital gains and to have more flexibility over when charities will receive your grants.

Would you like to make a donation that supports a cause you believe in and reduces your taxes? Maybe you would like to get the tax benefits now but take more time determining which charities should get your money. Many high-earning physicians find that taking advantage of a donor-advised fund is often a simple, tax-savvy way to make charitable contributions.

What is a donor-advised fund?

A donor-advised fund (DAF) is a special type of account used specifically for making charitable donations. You (the donor) make contributions to a nonprofit, third-party entity that hosts the account (the sponsor). You then recommend to the sponsor which charities should receive your donations.

Your contributions to the DAF can be made in the form of:

• Cash.
• Securities (stocks, mutual funds, exchange-traded funds).
• Real estate.
• Private equity interests.
• C corp and S corp shares.
• Cryptocurrencies.

Once a contribution has been made to the DAF, the transfer is irrevocable. Always consult your financial adviser before funding your DAF to discuss the option most beneficial to you.

Julianne F. Andrews, MBA, CFP, AIF, began her career in financial planning in 1988 and co-founded Atlanta Financial Associates in 1992, merging into Mercer Advisors in 2020. She specializes in working with physicians and executives in the health care industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. She has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ Best-in-State Wealth Advisors since 2018. She can be reached at jandrews@merceradvisors.com.

Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. All expressions of opinion reflect the judgment of the author, are as of the date of publication and are subject to change. The information discussed is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Due to various factors, including changing applicable laws, the content may no longer be reflective of current opinions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Mercer Advisors. Mercer Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.