Donor advised funds: How to manage your giving

When it comes to helping others, people are opening their wallets wide. Charitable giving topped $499.33 billion in 2022, up from $484.85 billion in 2021, with individuals accounting for 64% of all charitable giving last year.¹

If you’re planning to give to charity before the end of the year but need more time to decide where to ultimately direct those assets or would like to donate to a number of different causes over the course of many years, a DAF may be a good option.

Administered by a 501(c)(3) public charity, a DAF manages charitable donations on your behalf, while giving you important—and immediate—benefits. Let’s look at what you need to know before considering.

• Potentially immediate tax benefits: When you contribute assets to a DAF, you may take a federal income tax deduction in the year the donation is made, subject to certain limitations.²
• Flexibility: DAFs allow you to recommend the amount and timing of grants to qualified charitable organizations, including other tax-exempt public nonprofit organizations, US religious organizations, and US-qualified domestic and foreign charities. You can also delay decisions on where your money is going until you develop a more thoughtful and impactful giving strategy.
• Growth: Let’s say you hold securities that have appreciated significantly. By donating the securities to a DAF, you will not owe the potential capital gains tax on the appreciation, and can give yourself time to decide when and where to make your charitable donations. Between the time you make a donation to a DAF and when you finalize your giving strategy, the donated assets can be invested, with the potential to grow tax-free.
• Streamlining: Some DAFs streamline your paperwork and administer disbursements, providing you with necessary documentation to claim a federal income tax deduction.³ You will also receive regular statements listing gifts, grants, fees, and investment performance for your records.

DAF investment options typically include separately managed accounts, mutual funds, and exchange-traded funds. You can contribute to a DAF through a sponsoring organization who offers them. Though you cannot contribute directly to a DAF through E*TRADE, Morgan Stanley offers the Morgan Stanley Global Impact Funding Trust (MS GIFT), which enables clients to align investment decisions with impact priorities across their portfolio. MS GIFT, and some other DAFs, also accept “complex” assets such as private stock, artwork, and cryptocurrency, to name a few.

Important to note: Most DAFs require a minimum initial contribution and minimum grant recommendation. MS GIFT's minimum initial contribution, for example, is $25,000 and the minimum grant recommendation is $250, but there is no annual grantmaking requirement.

For individuals, the maximum federal income tax deduction when gifting cash to a DAF is 60% of adjusted gross income (AGI), although you may carry forward deductions exceeding AGI limits for up to five years.

Also, all donations you make to a DAF are irrevocable.

A DAF gives you the flexibility and time to involve family members in your strategic giving, providing you the opportunity to share the causes that are important to you and learn more about those important to your family members. You may name a successor to continue managing your giving plan when you are no longer able to do so. And, if you already have a DAF, you may open a “NextGen DAF” through Morgan Stanley with a lower minimum investment, giving your children and grandchildren the ability to give to their own causes and showing them the importance of giving.

DAFs are an accessible way to enjoy tax benefits and are among one of the easiest ways for you to facilitate your charitable giving. Here are some questions you may want to ask yourself before considering a DAF:

• What is the minimum investment requirement?
• What kinds of assets can I contribute?
• Do I have other complex assets that I would like to donate?

All in all, DAFS could be especially useful in years when you may be seeking a charitable deduction, but also want more time to finalize a giving strategy. By donating to a DAF by Dec. 31^st, you could achieve your tax deduction target.

In addition to MS GIFT, you can also donate stock from your E*TRADE brokerage or stock account. To do this, just head to E*TRADE forms and applications page to get started. You may also be qualified to donate from your retirement accounts.

1. The 2023 Giving USA Report: Giving USA: The Annual Report on Philanthropy for the Year 2022 (2023). Chicago: Giving USA Foundation.

2. Clients must itemize their deductions in order to claim a federal charitable tax deduction. The federal income tax deductibility of contributions to a donor-advised fund are subject to certain limitations. These may include but may not be limited to: Donating long-term appreciated securities may be eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of adjusted gross income (AGI). Donating cash may be eligible for a maximum federal income tax deduction of 60% of AGI. For long-term appreciated gifts of artwork, antiques, books and other tangible personal property, the deductibility rules depend on how the qualifying charity uses the gift. There are additional asset classes and types of contributions which may have additional and/or different limitations. Clients should consult with their tax advisor on the income tax implications and tax planning around gifting activity.

3. The taxpayer will have to include a form in their tax return filing and may need to get a qualified appraisal.  The DAF would not do this on their behalf.

The source of this article, Donor Advised Funds: A Tax-Efficient Way to Manage Your Giving, was originally published on October 24, 2022.