An Overview of Donor-Advised Funds

Sometimes, it just might seem that it is too complicated, time-consuming, or downright expensive (tax-wise) to contribute all the funds you want to give away to charity. You might finally be in a position to help the causes that are near and dear to your heart but the process is a little more involved than you envisioned. There are more time-efficient and cost-efficient ways to give to charity, though; one of these vehicles is known as a donor-advised fund (sometimes called a giving fund). 

How Does a Donor-Advised Fund Work?

An account is set up with a non-profit organization, such as the National Christian Foundation. The account functions similarly to a charitable savings account. However, the individual donor involved in a donor-advised fund is able to fund the account with illiquid and unusual assets; this stands in contrast to other giving vehicles, which prefer cash or checks. Examples of such assets include:

  • Business interests
  • Publicly traded stocks
  • Real estate interests
  • Art
  • Cryptocurrency
  • Other non-cash assets

Stocks, for example, are able to appreciate until they are transferred to the donor-advised fund. The nonprofit acting as the fund manager can quickly and efficiently transfer the shares to a charity recommended by the original donor. Subsequently, there are no capital gains taxed on the sale of the stocks. 

Donor Advice

An important note here is that original donors relinquish control of the assets once they are transferred to a donor-advised fund. However, the original donors are able to voice their preferences on which charities they wish to support. In most cases, the original donor’s wishes are followed–but there are exceptions. These exceptions are slim, and so the Donor Advised Fund becomes the equivalent of a charitable checking account. 

How Does a Donor-Advised Fund Save You Money?

First, the giver gets a federal tax deduction equal to the amount donated.  Individuals can gift up to 30% of their adjusted gross income each year (and for 2020 because of COVID, this amount has been expanded to 100%).  This donation creates tax savings, but because it is non-cash, does not cost the giver any cash out of pocket. Accordingly, a business owner can contribute a small percentage of their company, reap the tax deduction from the donation to reduce their current year income taxes by 30% and pay less taxes upon the sale of the company.  This strategy is particularly powerful for business owners looking to sell in the next 1-5 years because it puts more cash in their pocket through current year tax savings, but does not adversely impact valuation by creating more expenses.  Additionally, as mentioned above, appreciated property that has been placed in a donor-advised fund does not trigger the capital gains tax when it is sold. You can place certain stocks (including non-voting stock in your company) in a donor-advised fund and it will continue to appreciate–tax-free. Accordingly, the benefit is two-fold: a current year deduction against income and no capital gains tax upon sale. This means you don’t have to sift through mountains of paperwork at the end of the year to try to figure out your charitable deductions. 

Triple Bottom Line

There are countless situations in which setting up a donor-advised fund makes financial sense. If you have assets that are continuing to appreciate yet you do not have the slightest idea where you want to send a donation, placing them in a donor-advised fund can protect their value while you figure out where you want them to go. It can also allow a giver the flexibility to make the gift over time to make sure the recipient uses it wisely.  What’s more, the nonprofit handling your donor-advised fund will handle all the necessary paperwork and will provide one consolidated statement to file with your taxes. 

These advantages combine to benefit more than one bottom line: you save money by saving time; you realize enormous tax savings; and, most importantly, you affect a positive social impact. 

If you want to figure out a way to give more by being smarter about the way you give, we’d love to sit down with you and figure out how to achieve that for you. To bypass our intake process, you can simply schedule a call with us directly through this link.

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At Soterian, our goal is to help business owners like you think bigger. Bigger than today, bigger than your business, bigger than yourself.
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