DAFs are the gift that keeps on giving

It’s the season when people keep on giving, and financial planning organizations are asking advisors to talk to their clients about contributing to donor-advised funds.

“One of the main reasons for the popularity of DAFs is just the simplicity in being able to create a donor-advised fund to have that look and feel of having your very own private family foundation without the headache and expense,” said Kyle Christopherson, senior vice president of client success at REN. “As far as charitable giving tools are concerned, this is definitely one of the most popular today and the fastest growing that we're seeing.”

The National Philanthropic Trust’s 2023 Donor-Advised Fund report showed a 9% increase in grants made from DAFs in 2022, to $52.16 billion, a new high for grant money. Contributions also grew 9%. While grants and contributions showed growth, charitable assets in DAFs declined, in part as a result of stock market losses.

There are increasing benefits to consider related to putting money in a DAF. The vehicles offer immediate tax deductions, simplified charitable giving, and the potential for asset growth. They also help create a philanthropic family legacy.

“It’s also a great way to get your children involved in in philanthropic giving in and let them see the benefits of engaging with their community through charitable giving,” Christopherson added.

Those who give to charity through a donor-advised fund can receive a few deductions and tax benefits. For charitable contributions, whether it's to a donor-advised fund or charity directly, there's a maximum limit individuals face, which is based on adjusted gross income, says Richard Pon, an advisor and CPA.

“If you're doing cash, the total you can do for a year is 60%. If you're doing non-cash, such as securities, it’s 30%,” said Pon.

Carlos Lowenberg, founder and CEO of The Lowenberg Group, said he’s even seen people donate appreciated vehicles to charities or auctions.

Lowenberg added that DAFs are a missed opportunity for a lot of wealthy investors who want to do something good and something for themselves at the same time.

“Business owners [especially] who are getting ready to sell their business and looking at charitable planning and philanthropy can make a massive difference in what their net after-tax proceeds are when they sell their business,” he said.

Lowenberg said clients can contribute public or privately held stock to their DAF. With a privately held entity, there needs to be a valuation process. Then, it has the added benefit of providing the deduction for the value of the gift, while avoiding paying capital gains on the stock, as opposed to selling it and making a gift.

“It's a more efficient gift,” he said.

Cinira Baldi, chief development and communications officer at Project Hope, said there's a bit of controversy around DAFs. While DAFs have grown exponentially over the past several years, there are no rules around releasing funding from DAFs.

“Someone's DAF could sit for years without any money being released, and that becomes a problem for charities who are relying on charitable donations to do their critical work,” Baldi said. “You've got billions of dollars just sitting with financial institutions that could actually be going toward people who need the funding.”

Christopherson adds an important reminder: Once a donor-advised gift has been made, there’s no chance of seeing those funds again.

“Whenever you're making that donation, make sure that you are able to handle that kind of gift,” Christopherson says. “You don't want to give so much that you don't have enough for your immediate needs or anything along those lines.”

Baldi added it's the perfect time of year for clients to look at their top three charities and make a gift from a DAF.

“Look to release money and make a donation. Don't forget to make the donation part,” she said.