Three Ways A Donor-Advised Fund Pushes the Limits on Giving

A girl with her family points at a barn
A donor-advised fund provides a place to store wealth for giving, rather than hoarding resources like the rich fool who built bigger barns for his excess.

A DAF can be a powerful personal finance tool for charitable donations that offers opportunities for radical generosity  

If you’re looking for a way to take the next step on the journey of generosity in the new year, it might be time to open a donor-advised fund.

As a simple alternative to a private foundation, a donor-advised fund isn’t just one of my preferred ways to give. It’s one of my favorite financial planning tools, period. In addition to providing a structured way to increase charitable giving, my fund has opened up new avenues for managing my entire budget.

A donor-advised fund, which I’ve seen described as a charitable checking account or charitable investment account, provides a way to make immediate tax-deductible donations but send grants to charities later. In the meantime, you can invest the irrevocable gifts so they (hopefully) grow until you’re ready to give.

Also known as a DAF, a donor-advised fund provides a place to store wealth for giving, avoiding the hoarding we see in the parable of the rich fool. It acts as a barn of sorts for charitable donations, making it easier to climb the ladder of generosity and set financial finish lines. It ensures that giving receives a prominent place in every budget, alongside spending and saving.

Since opening The Rich Fool Giving Fund in 2017, the DAF has shaped my finances in three important ways.

Short-term planning: Establish a monthly giving budget 

Any serious saver or investor knows the importance of regular contributions. Whether it’s an emergency fund or dollar-cost averaging, the discipline of setting aside money at predetermined intervals builds wealth over time.

The same concept applies to giving. When I create a budget each year, I include a line item for charitable donations. While a tithe goes to my church first, I also set an “above and beyond” giving goal each year. In 2019, I committed to saving and investing equal amounts. This year, after all the challenges of 2020, I decided to give 5 percent of my income to ministries focused on racial justice.

In both cases, I didn’t know initially where the money would go. Rather than stash it in a savings account where I might be tempted to spend or invest it, I set up automatic monthly contributions into my donor-advised fund. That way, the money can’t be used for anything other than charitable donations. And when I finally determine the specific causes that align with my vision, the money is there for the giving.

As a result, I never wrestle with whether I can afford a donation. The habit of giving regularly to a DAF guarantees there will always be charitable dollars on hand when needs arise.

Medium-term planning: Manage year-end finances

In addition to using a donor-advised fund to support a monthly giving budget, it’s also an effective way to manage year-end financial planning.

For the second straight December last month, I used my donor-advised fund to “pre-tithe” the next year’s church donations. By giving a lump sum to the DAF at the end of 2020 and scheduling monthly grants to my church throughout 2021, I can deduct the entirety of this year’s tithe on my April tax return.

Of course, the tax benefit of a lump-sum gift only applies to people who itemize their deductions. And because Congress nearly doubled the standard deduction in 2017, reducing the tax benefit of charitable contributions, the number of taxpayers who itemize has dropped dramatically.

For people who don’t give enough in a single year to itemize, a donor-advised fund offers a proactive solution. By giving multiple years of charitable donations at once, and then spreading out the grants, taxpayers who normally take the standard deduction might be able to itemize every few years.

I’ve done this kind of multi-year giving once. At the end of 2019, I pre-tithed three years of giving to offset the taxes of high income that year. The significant tax savings and additional monthly cash flow (from tithing via the DAF rather than regular income) came in handy when the market crashed due to COVID-19 and I bought stocks at a discount.

(Side note: I ended up giving away 50 percent of the pre-tithe in a single donation to a COVID relief effort. As a result, the advance donation only covered 18 months of tithing instead of 36. But that’s the beauty of a donor-advised fund — it empowers spontaneous giving when the money is already set aside.)

Whatever the financial situation, a donor-advised fund provides flexibility to proactively manage charitable donations, cash flow and taxes.

Long-term planning: Reduce long-term capital gains 

For investors and givers with a long-term horizon, there’s one more benefit of a DAF: the ability to reduce future capital gains taxes.

Coming out of the Great Recession of 2008-09, back when net worth wasn’t even a concept for me, I somehow found the wisdom and will to buy Apple stock. Those 20 shares I purchased a decade ago for $5,500 are worth 15 times as much today.

But if I sell my Apple stock tomorrow, my capital gains taxes won’t be too bad. On two different occasions, when I supported a missionary in 2017 and again when I received a financial windfall in 2019, I donated Apple stock to my donor-advised fund. I then bought the same shares again and reset my cost basis.

This financial strategy delivers the most benefits if the donated stock can be repurchased for around the same price. Alternatively, the donated stock can be replaced over time with dollar-cost averaging.

As a long stock investor, a donor-advised fund reduces my long-term tax burden. When combined with the monthly and annual financial planning advantages, the DAF acts as one of the most powerful personal finance tools in my arsenal.

The heart of a donor-advised fund

A donor-advised fund takes generosity to another level. For the new giver, it introduces the discipline of generosity. For the regular tither, it pushes beyond that giving baseline. And for the wealthy, it acts as a guardrail against the hoarding that turns us into rich fools.

But I do have one word of caution.

When I came into a large sum of money in late 2019, I contacted a Christian financial advisor about how to minimize taxes and plan for the future. His recommendations included a donor-advised fund, but he also warned against the dangers of formulaic generosity.

Specifically, he told me not to lose my giving spirit through robotic charitable donations. He advised me that a donor-advised fund shouldn’t replace sacrificial giving. As someone who once tracked spending down to the penny, I sometimes need a reminder that the most meaningful giving comes from the heart, not the budget.

A donor-advised fund elevates giving to its rightful place in a budget alongside spending and giving. When combined with the right heart, a DAF becomes a transformative personal finance tool that leads to radical generosity.

The Rich Fool

I'm a journalist turned marketer navigating the intersection of money and faith, and trying to find the balance between financial independence and radical generosity. I'm a Christian, husband, father and marketing executive figuring out how to wisely manage excess riches I never expected to receive.

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4 Responses

  1. Ivan says:

    Good going on organizing your giving – and as for the tithing aspect – I’m sure Moses would be pleased you are following the Law that carries his name. A great use of DAFs is to stash money to grow tax free – and then leave it behind so your missionaries can be supported long after you have been promoted to glory 🙂

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