Why Donor-Advised Funds Can Be a Wise Option for Charitable Investor

BY: MINDY HIRT  |  Senior VP & Wealth Advisor, Nashville

The stress and uncertainty of living through a pandemic affect everyone differently. For some investors, it might be stirring up an urge to donate to charity in the hope of making a small difference in the world.

There are many ways to make a charitable donation — the most straightforward, of course, is to simply write a check to the cause of your choice. On the other end of the spectrum, some wealthy investors opt to set up charitable family foundations, which offer tax benefits and structural flexibility, but can be administratively complex and expensive.

But there are other options for charitably inclined investors, including donor-advised funds (DAFs), which combine some of the tax benefits of a foundation with a lower financial barrier for entry.

Investors can open a donor-advised fund through a sponsoring organization like a local community foundation. Donors can fund their DAF with cash or other assets, then decide when they’re distributed and to which charities.

A donor-advised fund can be opened with an initial donation of $5,000. In contrast to a family foundation, which must distribute 5 percent of its funds each year, DAF distributions can take place on the donor’s preferred timeline; donated assets might sit unused in the fund for years, but the donor receives a tax write-off for the assets right away.

The donor relinquishes control over any assets put into a DAF (so they can’t be returned), and the sponsoring organization becomes the donor of record, which makes DAFs an especially good option for donors who prefer to stay anonymous. The specific investments within the fund, the level of risk and general investment strategy are all determined by the donor. Some sponsoring organizations also allow active involvement from an advisor such as Argent. 

Due to the historically long bull market that ended earlier this year, some investors may have highly appreciated assets that account for a large amount of their portfolio and would incur a sizable tax liability if sold. If those investors are charitably inclined, donor-advised funds can be a great strategy. Instead of selling the assets and paying taxes on them, a donor can place them into a donor-advised fund. By doing so, the donor receives a tax deduction, their chosen charities receive 100 percent of the benefit and there are no capital gains taxes to pay.

As a result of COVID-19, market values are down from their highs and many are facing financial uncertainty. Some new DAF candidates might not feel they can afford to irrevocably give away larger sums of money at this time — even if the needs in the community have increased. However, those who have already funded a DAF have a wonderful opportunity to respond to charities’ current needs.

There’s no doubt that many people out there need help right now — especially here in Nashville, where COVID-19 came directly on the heels of a devastating tornado in early March. So, if you’ve already established and funded a DAF, you don’t have to be hesitant about distributing more from the fund than you might in a normal year. Having it already set up allows you to respond quickly and generously when necessary — both now and in the future.

If you would like to discuss how a DAF fits with your overall wealth management plan, please contact me at (615) 385-2718 or get in touch with your local Argent representative.