Have Your Cake and Eat It Too: Donor Advised Funds

For the last month, I have been carrying around a bag full of clothes in the trunk of my car. I plan on giving them to the Salvation Army, but I still haven’t done it. So mentally, I’ve decided to give these clothes away, and physically, they are separated from my other things, but obviously, I would get no credit for this gift in the eyes of the IRS.

So what if I told you there is a scenario in which you can do exactly that—separate assets that you plan on giving, count the deduction now, but actually give them away later? Donor advised funds (DAFs) allow you to do exactly that, and they have become extremely popular within the last few years.

Once you donate to the fund, you have technically relinquished legal control of the assets, but they remain in a separate account that you can invest and grow tax-free. When you are ready to give, you can “advise” the DAF on where to make contributions. This timing flexibility allows you to maximize contributions in high income years while maintaining discretion on when the contributions are made.

The largest DAFs are sponsored by brokerage firms such as Schwab or Fidelity. In fact, Fidelity Charitable was the second most funded public charity in 2015. As the “sponsoring organization,” the charitable funds are technically separate 501(c)(3) organizations from the broker, but you can typically invest contributions in as wide array of investments as if they were the same entity.

Some families choose to create a private foundation that allows them to set aside money for future donations. But this type of foundation is tedious to manage and expensive to run, not to mention the deductions are limited to 30% of your adjusted gross income compared to 50% for DAFs. So donor advised funds allow for an extremely attractive alternative.

There are not many circumstances in life, much less with the Internal Revenue Code, that allow you to have your cake and eat it too. But donor advised funds are one of the precious few.


Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.