- By Elizabeth Wolleben Yoder
- Posted November 10, 2022
How Do Neurodivergents Use Donor-Advised Funds?
What is a Donor Advised Fund?
A Donor Advised Fund (DAF) is an account to accumulate invested savings for personally directed charitable donations. A DAF can be set up by an individual or a family using a company like Schwab Charitable, Fidelity Charitable, or local community foundations where a donor can continue to invest their savings for charity prior to gifting to their intended charity.
First and foremost, a DAF is a charity account. Individuals who use DAFs would benefit from understanding their own personal philanthropic goals when setting up an account to make sure the account is put to good use. Whether they are focused on neurodivergent leadership think tanks, animal rescue organizations, or any other passion, a DAF can support a charity as long as they are a registered 501(c)3 organization. Our certified financial planners can help you assess which neurodiverse charitable accounts may work for you.
Why are DAFs useful?
Donor Advised Funds are, by IRS code, individual charities themselves. Once a donor moves money into that account, the donor is eligible to report the gift within their annual tax records when they itemize, regardless of when the gift to an intended charity (grant) is made. When granting money to the intended charity, there is no tax impact on the individual, as the gift has already been made. Any growth within the account from investment activity can be passed on to charity with no taxes.
Because the account can most often be invested with options similar to a 401k or 403b retirement account, a DAF has the potential to both grow or lose money depending on changes in the market. Investing carries risk. If you plan to spend from the full balance each year, you may choose a more conservative investment option to safeguard what you put in the account. When the account has time to grow between contributions and distributions, you have the potential to be able to give more than you originally saved. Investment gains are never taxed, as the account operates as a charity.
What should a philanthropist at any level consider before setting up a DAF?
The size of contributions made by a donor is always up to the donor. I’ve worked with people who give their annual amounts to a donor-advised fund that they use throughout the year for their regular giving. I’ve also worked with people who move about five years of their regular giving into their charitable accounts at a time. The minimum amount to contribute to a DAF is dependent on the terms of the company that holds the account, but I’ve seen minimums of $25. There are also minimums for grants, but they too can be manageably small at a similar $25 per grant. When a grant is made, the DAF account writes a check to a charity, providing an easy cash gift that will be immediately available for use.
One reason for younger people or people without a lot of savings to open a DAF may simply be to help with personal mental accounting and cash flow planning. Monthly giving enables savings-restricted donors the ability to make more impactful annual gifts. Here are a few reasons why establishing a monthly giving plan to a donor-advised fund may be helpful:
- You want to minimize the impact of your annual giving on your own bank account
- You want to reduce the impact of monthly fees your preferred charity has to pay to run your credit card
- You want to reduce the amount of exchange losses that your local organization will have to pay when giving to an international organization (from currency discrepancies and international exchange fees)
- You want to give a more significant gift for special giving campaigns
- You want to save for a special gift outside of your countable resources for SSI and Medicaid
A DAF can act as regular annual giving or as a charity emergency fund, where money is set aside for those charitable times of crisis or joy that you want to support in a one-time gift.
Once funded they do not interact with government benefits. Money gifted to the DAF is owned by the organization itself. However, the complexity of having a DAF open may not be worth it over gifting directly to the charity if you want to gift as you are able. This may make more sense for someone who has to do a spend down in order to qualify for benefits. This would allow future giving to charity as they wish while on benefits. Gifting of one’s assets should be done with care to make sure you are not giving away money that you need, and we encourage you to work with an advisor who understands your life and your goals to help determine what the right amount for you might be.
People more established in their careers or who have taxable savings accounts or stock incentive plans use more complex tax planning that can be enhanced by the use of a Donor Advised Fund. These individuals can gift stock from a taxable account that is highly appreciated (or has grown over the years). If the investor were to sell the stock themselves, they could create a significant taxable income that may not be desirable. Not every charity accepts stock gifts and those that do may not accept what the donor wishes to gift. Companies such as Schwab charitable or Fidelity charitable allow donors to gift stock directly to the donor-advised fund through a transfer of assets. Once the fund receives the stock it’s sold with no tax impact on the donor.
This is helpful for people who have large positions in a stock holding that creates an overbalance of one investment or asset class in their investment portfolio. It also essentially turns illiquid assets (especially because of the tax consequences of the sale) into cash that can be distributed for charitable giving over time. Redirecting the security to a DAF makes the funds immediately available to gift to a charity or to save for future intended grants and also gives the opportunity to lessen the weight of that individual security on their investment portfolio without a taxable sale.
For people with irregular income streams, such as business owners and consultants, a high-income year may also have a high tax impact. A DAF can be used in years when people are increasing their income for other reasons too, including an unexpected bonus, a severance or retirement package, a company selloff, and an IRA withdrawal for a large purchase or Roth conversion. Any of these changes can shift someone’s tax bracket for one or a few years and can be controlled when using charitable giving as an income-smoothing strategy. Our certified neurodiversity financial advisors can help with tax planning services.
A DAF may be a good tool for someone to use to collect several years of their intended charitable giving into an account that would benefit them in that year. The idea of “bunching” giving in years of higher income help people itemize their tax deductions when they are may not always able to do so. If a donor is not usually eligible to use itemization, it may make sense to contribute several years of annual giving to a DAF in order to itemize in some years.
DAFs can have a successor beneficiary or a successor director so that you can identify who should receive or direct the funds when the original donor is longer living. Successor donors are never owners of the account and can never move money from the charity to themselves, but they will be able to continue making grants to organizations of their choice. A DAF cannot be viewed as an asset from Medicaid or the Social Security Administration because it is not owned by the individual donor. If a DAF does not have a successor beneficiary successor charity beneficiary or a successor donor, the funds are often left for that the company that established the fund to determine how to use the funds.
To be clear, we don’t recommend leaving an account without a beneficiary or successor director. Who knows what value that directors at the charitable fund have that may not fit your personal values are your choices. We much prefer that your values are reflected in the money that you saved over your lifetime. So instead of letting it sit in an account, we highly recommend that you make a plan for your charitable giving and that you share what you’ve saved with the communities that you care about.
The best way to use a Donor Advised Fund is to use it; not only to fund the DAF but to direct the savings towards charity, ideally during your lifetime. If you would like to review your charitable goals and how best to meet them, contact Planning Across the Spectrum for financial planning services for charitable giving to neurodiverse causes.