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Celebrating Donor-Advised Fund Day Thumbnail

Celebrating Donor-Advised Fund Day

Charitable Gifting Financial Planning Insights Investments

Today, October 9th, is Donor-Advised Fund Day – a day dedicated to celebrating and educating donors about this powerful way to give! At Woodward Financial Advisors, we’re excited to join in the celebration by sharing why we love donor-advised funds and how they can help you make the most out of your giving.

Fall feels like the perfect season to talk about generosity. As the air becomes cooler and the leaves start to change, there’s something about the fall season that encourages togetherness. Whether it’s gathering around a fire roasting marshmallows or celebrating holidays with family and friends, autumn creates an atmosphere of connection. As the season leads into the holiday period, people begin to reflect on their blessings and feel more inclined to give back.

For many families, charitable giving is an important part of their financial lives, and one of our favorite tools to maximize both generosity and the potential associated tax benefits is a donor-advised fund (DAF). A donor-advised fund is essentially a charitable investment account – you can think of it as your own personal giving account. You make a contribution into the fund, receive an immediate tax deduction, and then recommend grants from your fund to your favorite charities over time.

Why We Love Donor-advised Funds:

  • They simplify giving – Using a donor-advised fund consolidates your charitable contributions under one account. Instead of tracking multiple receipts, you receive a single tax receipt from the donor-advised fund provider.
  • They maximize tax benefits – Donating appreciated securities avoids capital gains taxes and provides a deduction if you itemize.
  • They provide flexibility – You can contribute once but spread your giving out over months or years, keeping your support steady for the organizations you love.

Contribution vs. Grant: When Do You Get the Deduction?

This is where things can get confusing.

  • A contribution is when you transfer cash or appreciated securities into your donor-advised fund. This is the moment you receive the tax deduction.
  • A grant is when you recommend a distribution from your donor-advised fund to a charity. You can do this right away or in future years.

The key takeaway here is that the tax deduction happens at the time of the contribution, not when the grant is made. This makes the donor-advised fund a powerful tool for the tax strategy called “bunching” – contributing several years’ worth of donations in one year to exceed the standard deduction and maximize your tax benefit, then continuing to make grants to charities each year as usual.

A Real-World Example of the Bunching Strategy: 

Let’s say you typically donate $5,000 per year to charities. If you spread that evenly over five years, your giving totals $25,000 - but each year, your donations may not exceed the standard deduction, meaning you don’t get any extra tax benefit.

Instead, imagine contributing the full $25,000 into your donor-advised fund in one year. That year, your charitable deductions surpass the standard deduction, allowing you to itemize and capture a much larger tax benefit. Meanwhile, you can still send out grants of $5,000 each year to your favorite organizations, so from the charity’s perspective, nothing changes.

This way, you get both the immediate tax benefit and the long-term flexibility to support charities on your usual schedule.

Pro Tips for Donor-advised Funds:

  • Name Your Donor-advised Fund as a Beneficiary
     Instead of naming individual charities as beneficiaries of your IRA or investment account, consider naming your donor-advised fund. This approach provides flexibility to pivot and change your wishes for your estate giving bequests without some of the typical costs and inconvenience of modifying your estate planning documents.

There are two approaches to naming successors of your donor-advised fund. First, you can preselect charities you love to receive all or a percentage of your donor-advised fund. This provides funds to charities more quickly than as a named beneficiary of your IRA or investment account, while alleviating the administrative burden on both the receiving charity and your executor. Alternatively, you may choose individual successors to help carry out your charitable wishes after your lifetime, which is a wonderful way to create a family legacy of giving.

  • Gift4Giving Program
     Some donor-advised fund providers offer programs like Gift4Giving, which let you give your loved ones - often children - the chance to direct a portion of your donor-advised fund to a charity of their choice. It’s another meaningful way to involve the next generation in philanthropy and share the joy of giving.

If you’re curious about whether a donor-advised fund could be the right fit for your charitable goals, we’d love to talk. Reach out to your Woodward team to explore how this strategy could help maximize your giving and your tax planning.

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