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May 20, 2025 14 mins

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Donor Advised Funds: The Basics and More

Charitable giving becomes truly powerful when strategy meets generosity. Tax Director Lisa Behan from MP CPAs joins us to unpack the often-overlooked financial tool that's changing how smart philanthropists approach their giving: Donor Advised Funds (DAFs).

The conversation dives deep into strategic approaches that can dramatically increase the power of your giving. Lisa shares brilliant tactics like "bunching" multiple years of charitable contributions into high-income years, contributing appreciated assets to avoid capital gains tax, and navigating the post-2018 tax landscape where standard deductions have changed the game for many givers. Whether you're facing a windfall year from a business sale or simply want your regular charitable giving to have a greater impact, these strategies could save you thousands while increasing what reaches your favorite causes.

Ready to transform your giving from reactive checkbook charity to strategic philanthropy? This episode provides the roadmap you've been looking for.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

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Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to the Knowing what Counts podcast, the
place where expert guidancemeets smart financial decisions.
Whether you're a high net worthindividual or a thriving
business, the experts at MPCPAsare here to help you protect and
optimize your wealth.
Let's get started, becausesuccess begins with Knowing what

(00:22):
Counts.

Speaker 2 (00:23):
Because success begins with knowing what counts,
want to make a lasting impactwith your charitable giving
while maximizing tax benefits.
In this episode of Knowing whatCounts podcast, the experts at
MPCPAs break down donor advisedfunds and how they work, their
advantages and how they fit intoa strategic financial plan.

(00:46):
Whether you're a seasonedphilanthropist or just exploring
your options, we've got theinsights you need to give
smarter.
Welcome back everyone.
I'm Sofia Yvette, co-host,slash producer.
I'm back in the studio withLisa Bien, director at MPCPAs.
Lisa, how's it going today?

(01:07):
Hi, sophia, it's going well,great.
So, lisa, go ahead andintroduce yourself to our
listeners.

Speaker 3 (01:16):
Okay, well, I'm really happy to be here today
having this conversation withyou.
As you said, I'm a tax directorhere at MPCPAs.
I've been with the firm foreight years, but my career as a
tax professional has spannedmultiple decades.
I don't want to say how many,but it is an even number and
it's not two, so you can figurethat out yourself.

(01:38):
I work with high net worthindividuals and families,
helping them with income andestate tax planning.
Individuals and familieshelping them with income and
estate tax planning, often amongor across multiple generations.
We look at impact, investingand philanthropy, which is a
really good segue into the topictoday.

Speaker 2 (01:56):
So, lisa, what is a donor advised fund and how does
it work?

Speaker 3 (02:02):
A donor advised fund, or a DAF as we'll call it, is a
vehicle for charitable giving.
I think of it sometimes as apiggy bank or a savings account
for charitable giving.
So a donor would contribute ordeposit funds into a donor
advised fund.
They can sit there and grow andthen, at their pleasure or

(02:23):
where there's a need, theywithdraw the funds as a
distribution or grant to a doneeorganization.

Speaker 2 (02:31):
Well, that sounds like a beautiful concept, Lisa.
How does someone set up a donoradvised fund?

Speaker 3 (02:38):
So donor advised funds are set up through
sponsoring organizations such asa financial institution or a
community foundation.
Typically, the minimum amountrequired to set up a donor
advice fund is a $5,000contribution.
There are no income limits,minimums, maximums.

(02:59):
Anybody of any income level cancreate a donor advice fund, but
your first stop in doing it iswith a sponsoring organization.

Speaker 2 (03:08):
Is there a timeline for distributing the funds from
a donor advised fund?

Speaker 3 (03:14):
There isn't a timeline, sophia.
You know the funds can sitthere and grow, once they're
contributed, for months, years,even decade.
Sponsoring organizations willencourage grant making, though,
because the purpose of a donoradvised fund isn't to just send
it and forget it.
It's to have an impact on acharitable organization's

(03:35):
missions.
So, while there are no settimelines, the idea is to have a
plan for how the funds aregoing to be used to benefit
public causes.

Speaker 2 (03:47):
And what are the tax advantages of creating a
donor-advised fund?

Speaker 3 (03:53):
Well, the first thing I'll say before we start
talking about tax advantages isthat a donor-advised fund
shouldn't be created without adonative or philanthropic intent
.
Once funds are contributed to adonor advised fund, they can't
be taken back by the donor andthey can't be used to benefit
the donor.
So while there are some taxbenefits we'll discuss if
someone's not interested ingiving away assets, they

(04:15):
shouldn't create a donor advisedfund because there's no gimmick
here.
Once the funds go into thedonor advised fund, they're
gonna go to charity at somepoint.
Contributions to a donoradvised fund are tax deductible
in the year they're contributedto the DAF.
When the funds are distributedas grants, there is no tax
deduction to the donor becausethey already took a tax

(04:37):
deduction in the year of thecontribution.
There are income-basedlimitations on the tax deduction
associated with a contributionto a death.
It's sort of technical, but acharitable contribution of
really of any kind but we'retalking about deaths today
cannot wipe out your entireincome so that you have no tax
deduction on the basis of thecharitable contribution.

(04:59):
There are a percentage ofincome limitations on the
deduction for the DAFcontribution that are a little
bit technical and a taxprofessional could guide you
through those rules the balancesin the DAF are invested for
earnings and growth but that isnot taxed to the donor.
So the fund can grow over timeand the donor has more to give

(05:22):
away, but that doesn't cost thedonor anymore.
So it's just the value.
The time value of the fundsitting there growing is really
what is the power behind a death.

Speaker 2 (05:35):
What types of assets can be contributed to a donor
advised fund?

Speaker 3 (05:40):
There is a variety of types of assets that can be
contributed to ADAPT.
Commonly, what we see is cash,securities.
Real property can becontributed, even cryptocurrency
.
Donations of real property area little more complicated
because they involve valuingreal estate and deed transfers,

(06:01):
so that's not as easy as cash orsecurities.
One caution I'd like to throwout is that qualified
distributions from IRAs that's,a certain type of distribution
that comes from an IRA and goesdirectly to charity, which is a
tax-efficient method of givingMaybe that's for another podcast
but those qualified charitabledistributions cannot be

(06:23):
contributed to a death.

Speaker 2 (06:28):
How much control does a donor have over the funds in
the donor advised fund?

Speaker 3 (06:35):
As the name implies, in a donor advised fund or a
death, the donor can advise orrecommend the grants from the
death.
The donor can advise orrecommend the grants from the
debt.
So if there is a charitableorganization that the donor
would like to support, they goto the sponsoring organization
and request or recommend a grantto that organization.
The sponsoring organization hasfinal approval or rejection of

(06:57):
that recommendation within IRSguidelines.
I've never seen arecommendation declined by the
sponsoring organization but Isuppose it could happen.

Speaker 2 (07:08):
How are the funds in the donor advised fund invested?

Speaker 3 (07:11):
The sponsoring organization has responsibility
for that.
So the sponsoring organization,whether it's a community
foundation or a financialinstitution, will take care of
investing the funds.
They're typically invested incash securities bonds, but
that's an administrative piecethat the sponsoring organization
takes care of.
They will issue reports on howthe fund is doing the earnings

(07:35):
year-over-year comparisons butthe donor doesn't make those
decisions.
The sponsoring organizationhandles all of that.

Speaker 2 (07:42):
So, lisa, how can a donor advice fund be used to
implement tax saving strategies?

Speaker 3 (07:49):
Sophia, this is really the meat of this topic.
For a tax nerd like myself, thetax strategies in using DAFs
really involve the timing of DAFcontributions, and the one that
comes to mind immediately is ina year where an individual's
income is spiking for somereason over their typical level
of income perhaps a large bonus,sale of a business,

(08:13):
distribution from anon-qualified retirement plan,
or maybe a lottery winning orsomething that is a year where
they may find themselves in ahigher marginal tax bracket than
they're used to.
The strategy when you're in ahigher tax bracket is to use tax
deductions against that taxbracket because they're more

(08:33):
powerful than using them in alower tax bracket.
So if you have donative intentand you want to be philanthropic
, you might consider bunchingall of your charitable
contributions, or several yearsworth, into the one year where
you have the high income inorder to achieve the highest
benefit for the tax deductionfor the charitable contribution

(08:55):
to the death yeah, you don'tremember.
In a death you can make a largecontribution, but perhaps you
don't know where you want tospend the money in terms of what
charities you want the money togo to.
You could make the largecontribution in the year of your
high income, get the benefit ofthe tax deduction in the high
tax year and then decide whereyou want those monies to go and

(09:17):
what charities you want tosupport.
So, again, this is a strategyaround timing and when years are
sort of aberrant against, it'ssort of out of the normal.
We think that's the first timewe think of donor advised funds
Along the same lines.
This is sort of more generaltax planning for when perhaps
not when you have a spike inincome.
It's just using donor advisedfunds generally to maximize tax

(09:42):
deductions, and this has to dowith the standard deduction that
individuals get versus theitemized deductions.
Most people know that in 2018,starting in 2018, the standard
deduction for individualsincreased by a lot.
The overall structure ofitemized deductions changed, so
we were no longer allowed todeduct all of our state and

(10:04):
local taxes.
There's a limit on that.
Deductions for investmentexpenses or some employee
deductions were eliminated.
So many of us were left withreally not very many deductions
and we ended up using thestandard deduction.
So consider someone who donatesto charity $5,000 a year, say,
and they don't have a mortgage.
They are likely using thestandard deduction.

(10:27):
Let's say, their next doorneighbor who doesn't give
anything to charity and alsodoesn't have a mortgage is also
using the standard deduction.
So you can see the person whogave $5,000 to charity is
getting the same tax deductionas the person who didn't.
So what one could considerdoing is bunching charitable

(10:47):
contributions say five yearsworth all, into one year.
Let's say you give away $5,000a year, in one year you could
put $25,000 into a DAF and youwould be exceeding the standard
deduction in that year.
So you do get some benefit taxbenefit for your charitable
contributions.
Then you'll have the DAF grantthe money out over the next five

(11:10):
years and it'll be more than$5,000 a year hopefully, because
it will grow.
So that's how bunching thedeductions into a DAF can create
some tax efficiency.
In following years you'llcontinue to use the standard
deduction.
So we've seen clients everythree years they've been making
a large charitable donation to aDAF and then they wait a couple

(11:32):
of years and then replenish theDAF.
It's sort of a cycle thatthey've created.
Finally, there's a general taxstrategy around DAF
contributions and aroundcharitable contributions in
general, and that is usingappreciated assets to fund
charitable contributions.
So if you use appreciated stockto contribute to a DAF, the DAF

(11:55):
gets that value.
That's the fund balance.
But that appreciation or thecapital gain that's embedded in
that stock escapes taxationBecause when you make the
contribution to the DAF your taxdeduction is the market value.
You don't ever pay that capitalgains tax.
That's a more efficient taxmove than selling that asset,

(12:15):
paying the tax, having to useother money to gross that amount
up to the value that you wantedto give to the charity.
So that doesn't apply to DAFs.
That applies to any kind ofcharitable giving that people
want to use.

Speaker 2 (12:27):
Most definitely so, Lisa.
Are there any other advantagesin setting up and using a donor
advised fund for charitablegiving that we haven't already
touched on?

Speaker 3 (12:38):
Two come to mind, Sophia.
The first is just really aroundconvenience of using a DAF.
If you don't use a DAF and yougive $1,000 away to 10 different
charities every year, you'relikely going on the portals of
10 different charities andhitting the give button and
putting in your credit card orperhaps your old school, and

(12:58):
you're writing checks andsticking them in the mail Using
a DAF.
In the same example, you couldcontribute $10,000 to a DAF and
you go to the DAF portal and youlog in and you say I want to
give $1,000 to each of these 10charities and, assuming that the
sponsoring organizationapproves those recommendations,
poof the donations are made.

(13:20):
So that's just a matter ofconvenience and logistically
it's a lot easier than goingaround giving donations, smaller
donations, to lots oforganizations.
The other thing that comes tomind that's not really so much a
financial issue is communityfoundations do a lot of
education on charitable givingoptions locally.

(13:41):
They can be used as a tool tohelp you organize charitable
giving around causes that youwant to support.
There are grant recommendationsthat community foundations make
in all areas, whether it's food, insecurity, education, youth
programming.
Community foundations can be areally good resource in helping
you sort of sift through theoptions for supporting your

(14:03):
community.
So those are two things thatare just part of giving.
They just make giving easier.

Speaker 2 (14:10):
Love it, Lisa.
We'll catch you in the nextepisode.
Have a fantastic rest of yourday.
Thanks, Sophia.

Speaker 1 (14:18):
Thanks for listening to the Knowing what Counts
podcast.
Ready to optimize your wealthand protect your future, visit
the mpgroupscpacom or call413-739-1800 to connect with our
team of experts.
Remember, success is aboutknowing what counts.
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