One common theme throughout this blog is Jenny's generosity. She was giving with her time, energy, money, skills and intellect. Her sons and I looked up to her when thinking of ways we could contribute to our community. For example, she inspired me to become a volunteer STEM tutor, Dylan to teach younger kids and Tyler to fix bicycles for donation.
In addition to being generous, though, Jenny also demonstrated great aptitude when it came to investing. One manner in which Jenny could combine her generosity with her ability to grow capital was through a donor-advised fund she created in 2020. Despite the high-falutin name, a "donor-advised fund" or "DAF" is rather simple--think of it as a 529, but instead of going to Junior's tuition, it's for donations to nonprofits. Equity can grow tax-free even if it's from interest or dividend payments, just as for a 529. Any gains for distribution are also tax free (which is largely the point) so long as the beneficiary is a 501(c)(3) nonprofit. A donor-advised fund often goes by the name "charitable fund" or "charitable account". Some institutions have a minimum amount to open account. Bank of America, for example, requires a $25,000 minimum. Jenny started our fund with Charles Schwab, which has no minimum amount required for opening an account.
As ever, when it comes to money matters, please consult with your licensed financial advisor to double-check what I say in this article or if you have any questions. That said, I note the following points:
Contributions you make to the fund are tax-deductible for the year of the contribution. Any distributions from the account to a nonprofit, whether the same year as the contribution or a subsequent year, are not tax deductible. Example: Let's say you donate $10,000 in 2020 to the donor advised fund. And, it grows to $15,000 by 2023 and you make a contribution of the entire $15,000 to Doctors Without Borders (a 501(c)(3)), also in 2023. Then $10,000 is tax-deductible for tax year 2020 and there is no tax on the $5000 growth. Moreover, none of the $15,000 contribution is tax-deductible.
We found that distributions from Jenny's DAF were eligible for employer-matching (Siemens, Varian and Intel in our case).
If you're feeling super-generous or have a blockbuster year and want to make a sizeable contribution to your DAF, remember the fund is still subject to gift tax implications. In 2023, $17,000 is the maximum one can give without impacting their lifetime gift tax exemption. So, whether you give to a person, a charity or your DAF, be mindful of the $17,000 exclusion. (Yes, you can give $17,000 to a lucky friend and another $17,000 to the DAF and it won't affect your lifetime exemption.)
A DAF account can be run like any other brokerage account if it's set up with a brokerage firm such as Charles Schwab, Fidelity or Vanguard. Your contributions can be invested in various asset-class exchange-traded funds. But, all proceeds must go to a nonprofit. Remember this can backfire should the value of the account go down--that would mean less money available for the nonprofit organizations you wish to contribute to. And, just as there are no taxes on capital gains, one can't write off losses from this account either.
Jenny realized in the spring of 2020 that due to the Treasury's quantitative easing during Covid (Remember the Treasury sending out stimulus checks in 2020?) combined with the Fed's zero interest rate policy ("ZIRP"--it's what enabled those 3% mortgate rates not so long ago) that the resulting liquidity would juice the stock market. She was right, resulting in a nearly 40% gain in her initial investment within a year that would eventually be distributed to her favorite charities in 2021 and beyond. This was amplified by the company match from our employers. If she had invested funds intended for donating to a nonprofit in a personal account instead, any gains would be taxed before donation. With a DAF, though, all profits went to--and will continue to go to--Jenny's charities of choice.
Jenny's favorite causes, by the way, are Doctors Without Borders, Child Advocates of Silicon Valley, Partners In Health and the Fistula Foundation.
♥️ !