For thousands of years, charitable giving has followed a familiar pattern: physical cash (or checks) handed directly to an organization. This was how I made my first charitable gift. At eight years old, when my parents gave me a weekly allowance, they encouraged me to be generous by giving $1 to our local church. Nervously, I brought my $1 to church that Sunday, waited for the offering basket, and dropped it in. Everything went smoothly, and I let out a sigh of relief, wiping the sweat from my forehead.
A New Paradigm Shift In Charitable Giving
This traditional way of giving is changing. Over the last 20 years, a new paradigm has emerged, making giving more engaging and even fun. Enter the Donor-Advised Fund (DAF), a revolutionary tool that has gamified the act of giving.
A DAF is a charitable giving account established with a sponsoring organization, such as a community foundation, public charity, alumni association, or investment firm. While the sponsoring organization (biggest sponsoring organizations) owns and controls the fund, donors receive advisory privileges, allowing them to recommend how funds are distributed or invested.
For example, my wife and I set up a DAF called The Shammy Fund (a blend of our names, Tammy and Shane) through the National Christian Foundation (NCF). While NCF technically owns the fund, they give us the privilege to recommend how donations from the Shammy Fund are directed to charitable organizations of our choice.
How a Donor Advised Fund (DAF) Gamifies Charitable Giving
While it may not seem transformational, having this Shammy Fund DAF gamifies my giving in the following 4 ways:
(1) Track your giving
If you give to multiple organizations, tracking your contributions can be cumbersome, especially during tax season. A DAF simplifies this process by acting as a centralized hub for all your donations. You’ll receive a single year-end giving statement and can easily track your cumulative giving goals, analyze which causes you’ve supported (e.g., homelessness, education, or health), and monitor how your giving evolves over time.
(2) Grow your giving
When you open your DAF, you connect it to your checking account and then send money over. The moment you send money over, it is called a ‘Gift’ and that is your completed charitable gift. Once the money is in your DAF, you do not have to then give it to a charitable deduction. You can actually invest your gift into a variety of investment options, from stock to bonds to many other options (depending on the sponsoring organizations available options). What this will allow you to do is give and then invest that giving so that your giving will grow. The moment your gift goes out to a charitable organization, it is called a grant.
DAFs are affectionately as a “poor man’s private foundation” because they allow anyone to set up a foundation that will pay out a percentage of their invested DAF money to any charitable organization. This means you could “superfund” during a year when you have extra income and then create a “camp foundation” that sends 10 kids to camp every year.
(3) Asset-based giving
Research shows that 90% of American wealth is held in non-cash assets, yet 90% of charitable giving is done in cash. This discrepancy is significant but understandable. Many small charitable organizations, such as adoption agencies, often lack the capacity to accept complex gifts like shares of stock or interests in undeveloped land.
This is where Donor-Advised Funds (DAFs) can make a difference. A DAF simplifies the process of giving non-cash assets by allowing the sponsoring organization to receive and manage these assets according to your instructions.
For example, let’s say you want to donate appreciated shares of stock to an art museum. Traditionally, you would need to sell the shares first, incurring capital gains taxes, and then donate the net proceeds to the museum.
With a DAF, you can instead donate the shares directly to the fund without selling them. This approach offers several advantages:
- Charitable Deduction: You can claim a tax deduction for the fair market value of the donated shares (up to 30% of your adjusted gross income).
- Avoid Capital Gains Tax: Since the shares are donated rather than sold, you won’t incur capital gains taxes.
- Maximized Gift Value: The sponsoring organization can sell the shares within the DAF, and the proceeds can then be directed to the art museum. This results in a larger gift to the charity and a higher deduction for you.
This process is a win-win: you maximize the impact of your donation, and the charity benefits from receiving the full value of your gift.
(4) Intergenerational giving
If you want to instill a legacy of philanthropy in your family, a DAF offers an ideal platform. You can designate your children as sub-advisors, granting them discretion over a portion of the fund. This not only empowers them to support causes they care about but also fosters a family culture of generosity and thoughtful giving.
Donor Advised Fund Summary
In summary, embrace the new paradigm of charitable giving by opening a DAF. It will gamify how you charitably give by allowing you to track all of your giving in one place, grow your giving over time as you super-fund your own mini-foundations, unlock more giving with asset-based giving, and facilitate more giving together as a family.
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