Giving in retirement
Giving in retirement requires A LOT of faith. No more paychecks. Fewer career opportunities ahead. It’s just you and your investments. Uncertainty is now your certainty. So, what’s the natural thing when you’re completely reliant on something out of your control? Give it away!
Of course, giving away your money is the opposite of what we’re inclined to do—our nature is to hoard rather than share. That’s why I admire those who step outside that instinct and open their hands in generosity.
With a high-five for your faith and generosity, let’s dive into three ways to save on taxes and give more to charity – a win-win.
In last week’s post I talked about donating appreciated stock. In this week’s post, we’ll add a spin to this by looking at Donor Advised Funds.
Let’s dive in.
Donor Advised Funds (DAFs)
Donor Advised Funds (DAFs) are the hidden gem of charitable gifting. And while they are growing in popularity, I still meet many people who have never heard of them.
What is a DAF and How Does it Work?
Donor Advised Funds are basically a charitable investment account.
Here’s how they work: You contribute to the DAF, get an immediate tax deduction, and decide which charities to grant to at your own pace.
Why use a DAF?
You may be thinking, “This sounds more complicated, why don’t I just donate to the charity directly?” Great question.
Here are some reasons to use a DAF over gifting directly to charity.
1) Tax Benefits
a. You get an immediate tax deduction allowing for potentially greater tax savings through deduction bunching.
b. You can avoid capital gains on the appreciated portion of the asset.
2) Flexibility
a. Donate now, give later. This is helpful in high-income years or selling highly appreciated assets.
b. Not all charities can accept stock. This is particularly true for smaller charities. When you grant from your DAF, a check is sent (rather than stock).
3) Simplicity
a. All your charitable giving is done from the DAF, minimizing the need for year-end tax statements (the DAF issues a giving statement).
4) The Ability to Receive Complex Gifts
a. In addition to being able to receive stock, bonds, and cash, DAFs can accept complex gifts like business interests, real estate, and other appreciated assets. Note: Not all DAF’s can accept complex gifts. Check with your DAF to confirm before processing.
Potential Downsides
There are some potential downsides to funding a DAF.
1. The gifting is irrevocable. Once you fund the DAF, you can’t get the asset back.
2. DAF providers do charge administrative fees. Most fees are in the range of .6% to 1% of assets managed.
3. There could be a delay in gifting. Some smaller charities may need to be vetted in the DAF’s system before processing. The DAF provider must confirm that the charity is legitimate before processing a grant.
Is a DAF Right for You?
Donor Advised Funds are ideal for high-net-worth individuals, those facing large tax bills (e.g., selling a business), charitable individuals whose annual gifts total below the standard deduction amount, or anyone who wants a structured long-term gifting strategy.
How to Get Started
If you’re interested in opening a donor advised fund, there are several good providers available. Fidelity Charitable, Schwab Charitable, Vanguard Charitable, and the National Christian Foundation are four popular options.
If you already have funds custodied with one of the above providers, it’s generally recommended to use their associated charitable fund for ease of use.
Once opened, you can select the security (or asset) you want to gift to the DAF.
I recommend having a gifting strategy in place to determine the timeline on granting from the DAF. That will also help you determine an appropriate investment strategy for the funds.
Wrapping Up
Donor-Advised Funds are a powerful tool to have in your retirement giving toolbelt. They offer flexibility, simplicity, and the ability to give strategically over time.
If generosity is part of your retirement plan, a DAF can be a great way to give with both intention and efficiency. Whether you’re looking to optimize taxes, simplify your giving, or gift a complex asset, a DAF can help you steward your resources well.
Next time, we’ll explore the Qualified Charitable Distribution (QCD) as another smart giving strategy to make the most of your generosity. Stay tuned!
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