Donor-Advised Funds Explained: The Most Underused Tax Strategy for Charitable Retirees

In today’s episode, you’ll learn more about:

• What a donor-advised fund is and how it works
• Why donor-advised fund assets have nearly doubled since 2020
• How donating appreciated stock can reduce taxes and avoid capital gains
• Why investment growth inside a donor-advised fund may increase charitable impact over time
• How charitable bunching strategies can create larger tax deductions
• Common donor-advised fund mistakes and misconceptions
• Real-world situations where donor-advised funds may fit into a retirement or tax planning strategy

Listen Now:

The Smart Take:

Go Inside the Episode: 

0:00 – Intro

2:32 – What is a Donor-Advised Fund?

5:08 – Why Clients Like Them

7:03 – Strategy #1

9:54 – Strategy #2

11:58 – Strategy #3

15:19 – Who is This Strategy For?

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

Today we’re talking about donor-advised funds. Assets in these accounts have nearly doubled since 2020, now total almost $325 billion in total assets. So why are they growing so quickly, and should retirees be paying attention? We’ll cover how they work, the tax benefits, and a few planning strategies that could make charitable giving more efficient.

Walter Storholt:

Back again on Retire Smarter, Walter Storholt alongside Tyler Emrick, and he is a certified financial planner, a chartered financial analyst, and one of the wealth advisors at True Wealth Design, where they help you no matter where you are in the US, plan for your financial future and retirement. We’ve got another great topic today, one that the first time I learned about this, Tyler, thought it was just really cool, a really neat thing for people to have access to and be able to control funds and all sorts of things like that for charitable giving. I don’t know, this is one of those things where I think it’s just a really neat tool that we have at our disposal, and it just sounds like fun too, to be the person that’s utilizing these strategies and controlling it in addition to the technical benefits of it as well.

Tyler Emrick:

You got it. And we’re giving. I mean, we’re talking about giving.

Walter Storholt:

We’re giving. So yeah, good stuff.

Tyler Emrick:

It’s always fun to talk about charitably inclined and how we can do it more efficiently.

Walter Storholt:

Yeah.

Tyler Emrick:

And we’re hitting the old tax button too. We always got to be touching on tax a little bit in the things that we cover. So it hits all those. And yeah, I mean, these donor-advised funds over the years too, Walt, they’ve just gotten so much easier to implement and use. So I think it’s a good topic to just dive into a little bit and just make sure we fully understand. I mean, like I think I said in the intro, a little over $325 billion in total assets in 2024. I mean-

Walter Storholt:

It’s a lot.

Tyler Emrick:

… it’s up almost 28% since the year prior. It is, it’s tremendous. I mean, I think the other, to round it out, I think I said assets have nearly doubled since 2020 in donor-advised funds.

Walter Storholt:

Just think about that, yeah.

Tyler Emrick:

The information’s getting out there, right?

Walter Storholt:

Yeah.

Tyler Emrick:

Families that are doing this are starting to realize just how impactful and beneficial that they can be. I think the number was something around like $54 billion or something was gifted annually out of these accounts. So you start looking at numbers in the billions, it resonates. So it’s like, “Well, hey, what’s going on with them? How do they work? Who needs to be looking at them?” is the topic and the discussion point as we drive into it today. But I’m sure there are some listeners that are like, “Well, hey, what the heck is a donor-advised fund in general?”

Walter Storholt:

Sure.

Tyler Emrick:

So let’s just-

Walter Storholt:

Start there.

Tyler Emrick:

… start there and make sure that we got from a high level standpoint. And essentially what it is, I like to think of it as your own personal charity. So it’s just really just an account, a brokerage account that can hold investments, that can be held in a money market account that’s interest bearing that essentially you control. But when you put money into those accounts, you get a tax deduction for them because that account is treated like a charity in the IRS’s mind. Now, the assets that go into these accounts do not have to be gifted immediately. They can be gifted out over a number of years, but the big key point is you get that tax deduction when the money goes into the account. So they have just a tremendous amount of benefits as you think about your tax planning, how you think about your gifting, and just making sure that you’re doing them in a very efficient way.

Walter Storholt:

Yeah. I think it’s really cool. It’s like, “Hey, I’d love to start a charity, but I don’t know how to go about really doing it all and opening up the proper paperwork and then making it …” Hey, you could just make your own charity in this way and figure out exactly what you’re going to do with it later. The flexibility of it’s really cool.

Tyler Emrick:

100%. Well, and those individuals and those families that maybe have created foundations or done … A lot of that’s slowing down a little bit because the donor-advised fund does it just so much more efficiently without the fees, the cost. And even you think about these donor-advised funds, how do they work when we pass? Well, hey, you can have one of your children run it and continue to gift out of it. You can have it go to all one charity. A lot of those issues that a foundation would solve, the donor-advised fund just does it in a much more efficient way, cutting back costs. And you think about, well, what can you get into these accounts? I mean, you could almost contribute anything. Cash, individual stocks, ETFs, mutual funds. I mean, heck, Fidelity each year puts out a update on their charitable gifting accounts and the flows that we’re in, and so on and so forth. And they had a unique comment in there about cryptocurrency is now one of the hottest things moving in. Some $600-and-some million of crypto was contributed in 2024 to these donor-advised accounts.

So anything that’s appreciated in value that you don’t want to sell and get a tax hit on, hey, put it in these accounts. You can sell them inside the accounts, zero tax it, and if you do it appropriately, you can get a tax deduction for it too. So it’s like a win-win all the way around as we think about how we use them. I think about our families here and some of the feedback that we’ve gotten in the last couple years. We hear consistently that it just makes their gifting even easier. You think about these donor-advised fund accounts like, well, you have a login, you just access it online, you can set up monthly grants to church or charity. Hey, at the beginning of the every month, cut a check to this church and have it be automatic.

“Hey, I do my gifting at the end of the year. I got a list of five charities.” You put the charities in, every year their addresses are saved, their information’s saved. You just go in, click a button, put the amount, boom, check goes out. You could even have a check sent to your address and then you physically take it into the church or charity too. So the ease of use that we hear from families that are using these accounts, where 15 years ago there was these private foundations that would do these, they were harder to manage, a little harder to do your grants, had to do some paperwork, now you can open these things at Fidelity or Schwab and you have a login. It just simplifies and makes that gifting so much easier to make it automatic- [inaudible 00:06:19]

Walter Storholt:

Or you could say, “Hey, I want to save up to make a big difference or have a bigger thing in a couple of years and let it build and grow.” And then boom, instead of having to always be doing the same distributions. That’s just another way of utilizing it, right?

Tyler Emrick:

Complete flexibility.

Walter Storholt:

Yeah.

Tyler Emrick:

Yeah, tremendously. So as we think about, well, hey, what are the strategies around these accounts? How are families using them? As I was thinking about the podcast, I was like, “Well, hey, I think there’s three overarching high-level things to be aware of.” So I wanted to just dive into them a little bit and just make sure that our families are aware. And hey, if we have these as a use case and as a tool, let’s just make sure we’re using them efficiently, effectively, and taking advantage of all the benefits that they have.

So the first strategy that I wanted to talk about and make sure was clear was, well, what are you putting into these accounts? Generally speaking, if you can put highly appreciated positions out of a brokerage account … Highly appreciated position can mean anything, a stock, an ETF, a mutual fund that you’ve had for 20 years that you’ve never sold out of because it has big gains. These are the perfect assets to just basically keep them invested, move the shares over to the donor-advised fund electronically. Once they hit in the donor-advised fund, you don’t have to keep them. You can sell them.

And that avoids you having to sell them and realize the tax hit. And gift cash, like so many families do. Hey, every week or every month you’re going to church, you’re gifting a check. Or your favorite alma mater or whatever, you’re writing a check. By gifting these appreciated positions, you’re avoiding that big tax hit. And the cash that you would have gifted, hey, re-up, buy it, invest it, and now you got a step up in basis automatically. So really being diligent and thoughtful about, well, what are we using to fund these accounts? I think is a pretty big opportunity.

Now, you do need to be mindful. There are deduction limits that you need to be aware of if you’re gifting stock. For cash gifts, generally you can deduct up to 60% of your adjusted gross income. For some of your stocks, sometimes that’s 30% of your adjusted gross income. So you do need to be mindful of, well, hey, if you’re making a big contribution to these accounts and if you’re doing it in the form of a stock or ETF, can you take the full deduction in that year? And that’s where, hey, a coordination with your financial planner, your tax advisor, where all that comes to fruition to make sure that you’re truly maximizing all the deductions that you can. Obviously, I always say, “Well, we don’t gift to these accounts to get the tax deduction. You’re gifting because you want.” But hey, if we can get the tax deduction, let’s do it. Let’s be efficient about it and use them that way. So think about what you’re using to gift in there, is the first big one here.

Speaker 3:

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Walter Storholt:

Makes a lot of sense. Yeah, I like that usage of it, and neat that you can still carry forward. So it’s layered to give you lots of opportunity here.

Tyler Emrick:

It is. It is. Yep. And if you don’t get to take that deduction, you’re absolutely right, it does carry forward to the next year, depending on if you’re taking a standard deduction or itemizing. We’ll touch on that a little bit, but you do need to itemize to get that deduction into these accounts. But number two thing I would think is very important to be aware of. We talked about what goes into the accounts. Well, what happens once they get in the account? What do you invest it in? These are brokerage accounts. Well, I mean, so that means that a lot of times you’ll have a list of investment options to choose from. Certainly, you can put it in there and invest in a money market, and right now the money markets in the accounts that we’re using are in that 3% to 4% interest range. All right, hey, good benefit. You’re putting the money in there, you’re getting an interest. All that interest just accumulates and then you’re able to gift more than maybe what you expected down the road. Awesome.

But a lot of times what we find is, these donor-advised funds, we’re maybe making a pretty sizable gift into them. Maybe two, three, four years worth of your gifting that you’re planning to do would go into these accounts in maybe one year, and there’s some maybe tax benefits reasons for that. But if you do that, well, then you might want to look at it and say, “Do I need to have it all in cash? Hey, should I maybe invest some of it inside of the donor-advised fund for those gifts that I’m going to do four and five years down the road so that way, hey, maybe we can earn a little bit higher expected return but still have some cash available to do my gifting over the next one or two years?” So being thoughtful about, “Well, hey, should I invest some of that cash? Am I comfortable with risk? How much risk”.

And just making sure that you’re still being a good steward of those assets that go into there, because it is a investible account where, hey, if we’re able to get a little bit of return in there, that’s better gifting and more money that you’re able to dole out of the account in the long run. So I think it’s a big missed … Not maybe a huge missed opportunity, but certainly something where a lot of families are like, “Oh, we can even do that?” Hey, because you don’t think about, “Well, hey, I can invest it. Hey, if I’m getting an interest rate, that’s great.” But especially for those individuals that are doing those big gifts, really considering should you be investing some of it, I think is maybe a missed opportunity for some families that you need to be aware of for sure.

Walter Storholt:

Yeah. What about bunching contributions?

Tyler Emrick:

You got it, man. That’s the other one. That’s the tax considerations. I mean, we’ve been in a world now for a number of years where the standard deduction is very high for families. I mean, married individuals filing jointly, standard deduction is up over 30,000 bucks. Why is that important? Well, as we think about a donor-advised fund, you’re only able to deduct if you itemize your deductions. So if you’re taking the standard deduction, a gift to a donor-advised fund, although it may simplify your gifting out, making it easier and easier to do that, you’re not necessarily getting a tax benefit from it. So what happens is, it’s saying, “Hey, a lot of families don’t have $30,000 of deductions.” Maybe they got their state and local taxes, the property taxes that they’re paying, maybe they got a little bit of mortgage interest that they’re deducting and then gifting.

So when you add some of those together, the question becomes is, how close are you getting to the standard deduction? And let’s say in a typical year when you add up your SALT deduction, which is your state and local taxes, maybe your interest on your mortgage, and then your normal gifting, maybe you’re right at that standard deduction. And okay, you’re not getting much of a tax benefit for the gifting, that’s okay. But in a scenario like that, well, hey, that’s when you start looking at, well, maybe I look at what I’m planning to gift in year two, three, four, maybe five years out and say, “Hey, if I got some extra cash or investible assets that have accumulated and appreciated in value, why don’t I just fund the donor-advised fund those three to four years or five years of gifting all at once?” Now you’re above the standard deduction and you’re actually getting a tax deduction for those gifts that you were planning to do anyway.

So, understanding the tax deduction side of it, and we call that a bunching strategy, where in one year maybe you bunch a lot of gifts to get up above that standard deduction, and then you just use the donor-advised fund over the next handful of years and dole out your gifts from there. Tremendous benefit. That’s where the true tax savings come into play as you think about actually itemizing and getting a tax deduction for it.

Walter Storholt:

Yeah. And it feels very much like the whole conversation around Roth conversions or when you’re withdrawing money in retirement and picking the best bucket or portfolio from which to withdraw that money and those funds, whatever makes the most taxable sense. It’s a lot like that conversation, just with the charitable contribution umbrella over top of it.

Tyler Emrick:

Oh, well, in the Roth conversions, I mean, certainly we’ve done bigger Roth conversions for families when they do bunching strategies, right?

Walter Storholt:

Right.

Tyler Emrick:

To fill up tax brackets- [inaudible 00:14:45]

Walter Storholt:

This is where they start layering in on each other, right?

Tyler Emrick:

Yep. Yep. Yeah. So that’s where that whole tax and income planning each year come to fruition and come into play, and really leaning on a good advisor or CPA to put that plan together for you to make sure that you’re not gifting more than you can deduct. Or, hey, should you be bunching or continuing the gifting strategy on a year in and year out basis? What investments should we be funding? All those questions are integrated and your financial advisor should be the one that’s in the best spot to help you navigate those decisions, for sure.

Walter Storholt:

My last question is, who does this? Is this just high-net-worth families? Can anybody do this? Is it age restricted? Is there a certain threshold where it makes more sense to do this versus just giving straight to charities, or is this, again, available to anybody to do?

Tyler Emrick:

I think it’s really available to anybody. The big caveat is, how much are you gifting? What is that number? Anything you gift is great, but for those families that are substantially supporting their church, charities, alma maters, things like that, I think anybody that’s doing that, this is a beneficial strategy for sure. The bigger those numbers are, probably the more opportunity that you have, but certainly, anybody that’s gifting at a reasonable clip should be reviewing, thinking about this and wondering, “Well, hey, should I be maybe looking at a bunching strategy using a donor-advised fund to simplify my gifting?” Anything like that, I think is big.

Obviously, we got to keep in mind too, hey, when you put that money in your donor-advised fund, you’re completing a gift. The assets are no longer yours, so that contribution certainly is irrevocable. You can control those grants, they call them, right from the donor-advised fund and the future gifts that are in there. So you do need to make sure that, “Hey, how does this fit into the strategy? Is this something that I’m going to do? I’m committed to the gifts.” If I’m committed to the gifts, then, hey, something like a donor-advised fund really could be a good tool in the toolbox for sure.

Walter Storholt:

I would imagine, as a final warning too, make sure that you’re tracking and have documentation of where those funds go when you pull them out of the account and who they’re going to and all that.

Tyler Emrick:

Hey, shoot, that’s one of the beauties about the donor-advised fund too, all that’s done by the custodian, Schwab, Fidelity, wherever you’re holding the donor-advised fund for. So truly, Walt, on the back end-

Walter Storholt:

That’s cool.

Tyler Emrick:

… if you’re using these accounts, it simplifies that. You can go back and look at your gifting history, you can have access to all those insights and you don’t have to track it.

Walter Storholt:

Gotcha. So it’s not like you’re going to the ATM and pulling money out of the donor-advised fund and then doing something with it and you need to track that. It’s all going to be-

Tyler Emrick:

Nope. It’s-

Walter Storholt:

… that electronic tracking from who it’s going to.

Tyler Emrick:

It’s all complete there. Yep.

Walter Storholt:

Yeah. That’s-

Tyler Emrick:

And then from a reporting standpoint on the year that you do that big gift or you fund the donor-advised fund, hey, you get that and you give it to your CPA, they take the deduction, and you’re there. Because it’s not like, “Hey, I need to keep track of five different churches and charities and all that, that I gifted to. Hey, I did one big gift to this donor-advised fund, clean, done.” And then even if you doled it out after, well, hey, no big deal. Don’t need to keep track of that from a reporting standpoint. The donor-advised fund itself is going to track and make sure that it’s a qualified charity, church, that type of thing for you.

Walter Storholt:

Nice. Very cool.

Tyler Emrick:

Yeah. Good deal.

Walter Storholt:

I love it. Thanks for the details on this and some of the clarification, but also looking at that big picture of where some of those opportunities are. Very, very cool. If you want to learn more about donor-advised funds, how they might fit into your plan, or if there’s another financial planning element that you’d like to discuss with Tyler and the team at True Wealth Design, it’s very easy to get in touch. All you have to do is click the link in the description of today’s show and you can schedule a 20-minute discovery call with an experienced advisor and go through your situation, see where some of these opportunities are, and ultimately explore if you’re a good fit to work with one another. They’re based out of Northeast Ohio, but work with clients all across the country each and every day, so don’t hesitate to reach out wherever you are. You can also find that link to schedule a time to talk at truewealthdesign.com, plus lots of other great resources on the website as well.

Tyler, thank you so much for your help on the show today. Really appreciate it and we’ll talk soon.

Tyler Emrick:

Absolutely.

Walter Storholt:

Yeah. We’ll see everybody next time, right back here on Retire Smarter.

Speaker 4:

Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.