What You Need to Know About Using Donor Advised Funds

One of the common tax strategies used to get a bigger bang for a charitable donation is by contributing to a donor-advised fund. For someone looking for a way to lock in a big tax benefit now, but without the need to donate to charity immediately, a donor-advised fund can be a good solution — as long as you plan it carefully.


Donor-advised funds are earmarked for charitable giving. At some point in time, the assets should be distributed to a charity, but the donation to the fund provides a tax deduction today. One of the main draws of donor-advised funds is that they often take suggestions from contributors as to where money should go. While the fund doesn’t have to follow the guidance of donors as to investments and charities involved, many do look for ways to involve donors.

It’s possible to find donor-advised funds with many major brokerages. Vanguard, Schwab and Fidelity all offer donor-advised funds, and you can also contribute to the National Philanthropic Trust. It’s important to understand that there might be minimums associated with these funds, as well as fund fees.

There are other ways to contribute to donor-advised funds, including those associated with smaller banks and charities. It’s even possible to create an “In Memoriam” fund or a fund related to a charitable foundation. It’s important to note that the fund needs to be properly sponsored with the money going toward a charity recognized by the IRS.


The biggest advantage to contributing to a donor-advised fund is the tax deduction. Your contribution to the fund acts as though you made a gift to a 501(c)(3) charity recognized by the IRS. You can deduct the fair market value of the asset you contribute (cash or stocks are popular). Be aware that there are some restrictions on the types of assets you can contribute. If you try to donate an illiquid asset that has a value of more than $5,000, you will need an appraisal.

There are limits to the amount of deduction, based on AGI, but there is a five-year forward carry ability if you exceed the threshold. Currently, your deduction is limited to 50% of your AGI when you donate stock and 30% of your AGI when you donate securities. So, if you ended up with a windfall that brought your income to $1 million this year, you could deduct up to $500,000 in cash or up to $300,000 in appreciated securities. Compare that to a “regular” income year if you earn $200,000. You could only deduct up to $100,000 for cash or $66,667 for securities.

Those in the highest tax bracket see the biggest benefit from these contributions. Additionally, this is a good strategy for someone who has received a large windfall. Whether you have inherited the money, sold your business or seen another income event, the rules allowing you to donate to a donor-advised fund can allow you to maximize your deduction today (and take advantage of the carry forward if needed). Front-loading your donation allows you to reduce your income drastically while still being comfortable.

Another advantage is that you don’t need to have the same documentation for your contribution as is required when you make a donation directly to a charity. Instead, the sponsor is responsible for providing documentation (in the form of a receipt) to the IRS. You just need to provide the information about the fund you donated to.

You can also avoid some of the hassles that come when you donate directly to charity — including ending up on a donor mailing list. When you contribute to a donor-advised fund, it’s easier to make anonymous grants, since sponsors don’t have to reveal who is sending money to the funds. Additionally, if you donate appreciated securities, these funds can be a great help to charities that aren’t equipped to handle non-cash donations. You donate securities, but the fund offers cash distributions to the charity.


The most important thing to remember when making your contributions is that once you donate the money, it’s gone. While most sponsors will take your wishes into account when distributing, there are no guarantees. Stay on top of the tax laws and understand the fees associated with the fund. If you have questions, consult a financial professional who can help you structure your charitable giving in a way that benefits the charity as well as you.

investing for retirement ebook ipad - McClain Lovejoy
investing for retirement ebook ipad - McClain Lovejoy
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