Donor Advised Funds for Charitable Giving: Pros, Cons, Taxes, and More
- Apr 10
- 6 min read
Many physicians are fortunate to be in a financial position to engage in charitable giving, and plan on donating money to causes that they care about. However, they may not be aware that there are strategic ways to do this that are advantageous from a tax perspective. In our online communities for doctors, we often see physicians asking questions about this, and one option that many consider is that of the donor advised fund. In this article, we’ll cover what a donor advised fund (DAF) is, who should consider using one, the tax advantages and implications of doing so, and pros and cons compared to other options for gifting to charity or charitable causes.
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How do you create a donor advised fund, and how do you choose where to house it?
Is it hard to maintain the DAF and donate from it, and what logistics should you know?
How is a DAF different from a Private Charitable Foundation (PCF)?
What are the contribution limits for donations to a donor advised fund?
What is a Donor Advised Fund (DAF)?
A Donor Advised Fund (DAF) is a charitable investment account that you can start in order to support charitable organizations or causes that you care about. They are amongst the simplest and most tax advantaged ways to give to charity, so they are growing in popularity as they reflect a hybrid between tax strategy and your plans for donations.
By creating this fund that is managed by a trustee, you as the donor are allowed to point the money towards the charities you would like to support. The money that you contribute is generally tax deductible in the year of the donation, although there is some nuance and complexity about how much you can contribute as well as how you claim the deductions.
Note that you can not get the money back, nor can you give it to non-charitable organizations or causes, but the timeframe in which you donate the money is not fixed. That means you can gift money immediately or many years from the year of donation. The advantage to not gifting it immediately is that the money can grow while it’s invested in the interim, and that growth is tax free for all parties involved. This increases your ability to gift substantially!
PSG Resource: Accountants for Doctors - as always, we recommend discussing your specific situation with an accountant prior to making any decisions about whether these are right for you. As we alluded to, there are nuances to these, and whether or not they apply to your particular situation.
How do you create a donor advised fund, and how do you choose where to house it?
Essentially, you can create an investment account with a public charity. These are available in many locations, including at brokerages such as Fidelity, Vanguard, or Schwab, as well as with other charity organizations. They cost very little, if anything, to set up, and don’t require complex legal paperwork to establish.
One caveat is that you do pay an assets under management (AUM) fee to the trustee of the donor advised fund, which can be significant. The more money you have in the DAF, the more advantageous the fees become, but when you’re picking where to put your money, you should look into the fee structures.
The other thing to keep in mind is that some DAFs may provide limited options on which charities are eligible for donating money to, so you’ll want to consider which options they have and how much flexibility you want when making the decision.
Once you’ve decided where you want to create the account, the next step is to make your (tax-deductible up to limits below!) donation to the account. This can consist of cash, stocks, or non-publicly traded assets such as business related assets or cryptocurrency.
Is it hard to maintain the DAF and donate from it, and what logistics should you know?
Investing within the DAF is much like investing within your retirement accounts. You choose what you invest in, with most of your options being mutual funds. The money will grow tax free.
For most DAFs, there is generally no requirement to donate a particular amount every year into the DAF, although some do have a minimum donation requirement. There is generally no requirement to distribute a specific amount every year to charities once the money has been invested.
You can choose to distribute funds from the DAF to any eligible IRS-qualified public charity.
There’s also no tax return for the DAF, which makes it very easy to manage.
Another nice thing about the DAF is that if desired, you can make it so that your donations are anonymous or not tied back to you.
How is a DAF different from a Private Charitable Foundation (PCF)?
As you can see, the DAF is a pretty simple avenue for donations that comes with tax advantages, but without some of the heavier lifting or requirements associated with a private charitable foundation, which does have required distributions, tax returns, and taxation on income. Additionally, the private charitable foundation can be complicated and expensive to set up, requiring complex legal paperwork and ongoing associated legal and accounting fees.
However, the private charitable foundation does allow a wider breadth of non-mutual fund investment options. It also allows you to pay people to sit on the board of directors, including family members. One significant advantage of the private charitable foundation is that you don’t have to pay assets under management fees if you are comfortable with managing your own investments.
Because of all the additional complexities of the Private Charitable Foundation, most people only elect to do these if they have a very significant amount of money that they plan on putting into the PCF, where the money saved by not paying AUMs would be a large enough amount that the paperwork, taxes, and compliance are all worth it. Another reason to elect a PCF is if you want more control over the charitable options, to pay family members, or if you want to be able to donate money to non- 501(c)(3) charities.
What are the contribution limits for donations to a donor advised fund?
You should talk to your accountant about this, as there may be more nuances, but generally speaking, if you are donating cash, you can deduct the full amount up to 60% of your Adjusted Gross Income. That number changes if you are donating other assets like business shares or securities.
This becomes particularly important if you’re selling a substantial business, because you may be able to offset some or all of the capital gains if you approach this strategically. Again, this discussion is beyond the scope of this article, but discussing with a tax strategist would be of benefit.
Conclusion
As you can see, the Donor Advised Fund (DAF) provides a method for you to make charitable contributions strategically in a tax advantaged way. If substantial charitable giving is something that you intend to do for any reason, it’s worth looking into this avenue both for the immediate tax deductions as well as a way to grow the amount of money you have available for donations in a tax free manner.
PSG Resource:
Accountants for Doctors - as always, we recommend discussing your specific situation with an accountant prior to making any decisions about whether these are right for you. As we alluded to, there are nuances to these, and whether or not they apply to your particular situation.
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