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Brightwater Advisory

Donor Advised Funds

Brightwater Donor Funds

We have had increasing questions and interest from clients for Donor Advised Funds and we continue to be intrigued with their possibilities in financial planning, tax planning, life planning and practicing generosity.  The following is an excerpt from our fourth quarter Brightwater Advisory Client Letter describing DAF’s and how they work:

There are plenty of ways to donate to charity and “Donor Advised Funds” are rapidly gaining in popularity as they have become much easier to administer.  Many custodians have created easy to open and easy to give charitable account capabilities.  For example, at one major custodian, you can open an account with a minimum irrevocable contribution of $5,000.  “Contributions” to the DAF can be in cash or non-cash assets like appreciated public company stock or even real estate.  The entire amount you contribute is eligible for a tax deduction so long as you “itemize” in the same tax year.  Annual custodial account administration fees can start as a small percentage of assets (for example, less than 1%) and some are even capped at $100.00.      

How Do Donor Advised Funds Work?

After you have opened your account, which can take as little as ten minutes to apply online, you can make additional contributions to the DAF at any time and you can allocate your contributions in traditional investment vehicles.  Gains and income in the account are not taxed and thus increase the balance you can “grant” to charity over time.

If you do not regularly itemize deductions for your federal taxes, then making a larger contribution in a single year in which you will itemize will be much more tax efficient than smaller contributions across several years.  You can still spread your grants to charities over multiple years.   

When it comes to giving to charity, some custodians will permit you to direct grants as little as $50 at any time to any IRS-qualified 501(c)(3) organization.  Once you have named your charities, custodians can generate personalized letters featuring your own custom letterhead and they mail the checks, keep track of your contributions and grants, and compile an annual report for you at tax time.

When you contribute to a donor advised fund, you are making a charitable donation to a 501(c)(3) tax-exempt public charity. 

Contribute cash or investments without paying capital gains taxes.  When making contributions, it is best to donate highly appreciated assets you have held for greater than one year.  This type of contribution will both increase the value to your charity while maximizing your tax benefit.  Asset type and holding period will affect your tax deduction so please consult with your tax preparer as you evaluate your contribution and granting options.

If you are interested in learning more, please feel free to contact Barry Brindise, Associate Advisor, or David Maddux, CEO / CIO, at Brightwater Advisory.  We are always happy to help folks “give” more efficiently.