That’s a very philosophical question, but important nonetheless, especially when it comes to your relationship with money. Healthy relationships with money can often be illustrated by generosity and charitable intent. This can also be an important lesson to pass on to future generations.
When looking at long term charitable or philanthropic giving, this is normally when the concept of private foundations would come up, but their costs and requirements are historically restrictive for many families. Enter Donor Advised Funds.
A Donor Advised Fund (DAF) is a single “giving vehicle” established at a public charity. The donors make irrevocable charitable contributions, receive an immediate tax deduction, and recommend grants from the fund to qualified charities over time. While they were created in the 1930’s, they really did not grow in popularity until the 1990’s. Their flexibility and cost-effectiveness, along with the ability to maintain a relationship with your financial advisor, make these great options for all levels of gifting.
So how might the use of a DAF work in practice? Take the example of John and Susan. John and Susan have 4 adult children and 5 grandchildren. They have worked hard to instill a generous spirit in their children and they want to continue that with grandchildren as well. The Clarks, now age 70, opened a Donor Advised Fund with $50,000 worth of appreciated stock 6 years ago, and have funded it each year with $5,000 in cash. The DAF has grown to $100,000. As a goal of their retirement, they invite their entire family on week-long vacation once per year. This week is full of fun and connection, as well as one day dedicated to giving. In the morning, they all go out and serve the community in some small way, and in the afternoon they ask each child and grandchild to make presentations to the entire family of charities that they believe are worthy of a grant from their DAF. The family then votes on which charities will receive a designated amount of grants to be distributed that year. John and Susan have found that this combination of serving and giving has not just been bonding, but working to impart a heart for philanthropy in their family.
John and Susan were able to claim the maximum charitable deduction for the $50,000 worth of stock they gifted, and avoid paying capital gains tax on the appreciation of the gifted securities. Since the fund is a charity, the stock can be sold without and tax on the gain in order to be diversified and invested in line with the purposes and time horizon of the fund. The flexibility of the DAF allows them to choose to grant significant sums of money one year and none another year. They also can add monies to the fund as they are able, and receive any available tax deduction in the year of the gift. While John and Susan are the advisors on the fund, they have designated each of their four children as successor advisors to allow this legacy of giving to continue through multiple generations.
For those who have a charitable spirit, but not the means or desire to create a private foundation, a DAF might be just the right giving vehicle to provide the legacy they want.
This is a hypothetical example and is not representative of any specific investment. Your results may vary. Content in this material is for general information only and not intended to provide specific tax, legal, or investment advice or recommendations for any individual. Consult the appropriate advisor prior to making any financial decision. No strategy assures success or protects against loss. Investing involves risk including loss of principal.