How to Use Donor-Advised Funds to Maximize Tax Savings

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A donor-advised fund is a philanthropic vehicle that allows individuals to make charitable contributions, receive an immediate tax deduction, and then recommend grants to their favorite charities over time. This approach offers several advantages over simply writing checks directly from your personal checking account. Hi, I’m Alex Wolfe, Certified Financial Planner and Head of Financial Planning at Base Wealth Management. Today, I’m going to show you the power of a donor-advised fund compared to how you typically give to charities. Like and subscribe to this channel for more helpful financial tips.

1. Immediate Tax Deductions

One of the most significant advantages of a donor-advised fund is the ability to claim an immediate tax deduction in the year you contribute to that donor-advised fund, even if the donation is to a specific charity or made at a later time. This allows donors to maximize tax benefits in a high-income tax year and distribute the funds strategically over multiple years. In contrast, writing a check to that charity only happens in that one period.

2. Tax-Efficient Contributions

Donor-advised funds offer the flexibility to contribute a variety of assets, not just cash. Donors can contribute appreciated securities like stocks or mutual funds, which may have increased significantly in value. By doing so, the donor avoids paying capital gains taxes on that appreciated asset and still receives a tax deduction for the full fair market value. This is often more tax-efficient than donating cash from your checking account.

3. Simplicity and Centralization

A donor-advised fund simplifies the process of charitable giving. Rather than keeping track of individual donations to multiple organizations throughout the year, donors can contribute to the DAF once and make the grants themselves to various charities at their convenience. The fund administrator handles all the record-keeping, tax reporting, and distribution logistics, providing a streamlined and organized approach to philanthropy.

4. Potential for Growth

Donations placed into the donor-advised fund can grow tax-free. This means that while the donor decides which charities to support, the funds in the DAF may appreciate over time, potentially allowing for larger grants in the future. Writing a check, in contrast, only involves that single amount to the charity.

5. Flexibility and Grant Timing

Donors using a DAF are not required to distribute all the funds at once. They can take their time deciding what charities to support and how much to grant. This flexibility allows donors to be more thoughtful and strategic with their giving. With a check from a checking account, the donation is final once you’ve written it and given it to that charity.

6. Family Involvement in Legacy Planning

A DAF can serve as a tool for engaging family members in charitable giving. Many donors use a DAF to involve their children and other heirs in decision-making, fostering a sense of responsibility by continuing a family legacy of philanthropy. By contrast, writing a check provides no formal structure or engagement for anybody else.

Anonymity Options

Donor-advised funds also offer the option of anonymous giving, which can be valuable for donors who wish to keep their charitable contributions private. Grants can be made to charities without revealing the donor’s identity. In contrast, writing a check typically requires disclosing personal information to the recipient.

Using a donor-advised fund for charitable donation provides numerous advantages over writing checks from a personal checking account. The potential for immediate tax deductions, tax-efficient contributions, investment growth, and flexibility in timing make donor-advised funds an attractive and strategic option for donors looking to maximize their charitable impact while simplifying the process.

Additionally, donor-advised funds offer unique opportunities for family involvement and the option for anonymity, further enhancing their appeal for philanthropic individuals and families.

I’m Alex Wolfe, Certified Financial Planner. Thanks for watching, and consider checking out our website, basewealthmanagement.com, for more helpful information or to schedule a meeting. We’ll see you on the next one.

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2022 Tax Document Information

As a Base Wealth Management client, you should receive your paper tax documents via mail in the coming weeks. Or, if you previously had an online account with Pershing’s NetX360, you should be able to access your 2022 tax documents through that portal. 

If not, or if you experience any issues, please reach out to Tim O’Brien (tim.obrien@intervestintl.com).

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