The popularity of the donor advised fund (DAF) has become a national movement in charitable giving. In 2016, America’s biggest charity by donations from the public was Fidelity Charitable, a donor advised fund sponsoring charity. By one estimate, contributions to all donor advised funds in 2016 alone exceeded $23 billion – yes, that is billion with a “b.” Donor advised funds are not only for your wealthy clients, as a DAF can be established at many sponsoring charities for as little as $5,000. Your middle-class clients who make relatively modest but regular annual gifts to their favorite charities will appreciate being informed how a donor advised fund may allow them to continue to benefit from the tax deductions for gifts to charity in this new tax environment.
Benefits Remain Under the New Tax Law
Under the new tax law, itemized deductions have been either eliminated or severely limited. Combined with a much higher standard deduction ($12,000 for singles and $24,000 for married couples filing jointly), clients may find that they no longer itemize deductions, eliminating the federal tax benefit for their charitable contributions. Making a larger gift to a donor advised fund might enable the client to itemize their deductions and also provide a source of funds for their future charitable gifts.
How It Works
A donor advised fund is a charitable giving program at a public charity (known as the “sponsoring charity”) where a donor can make an irrevocable gift to a fund they have established and receive an immediate income tax charitable deduction. The fund donor can then suggest grants over time from their fund to their favorite public charities. Financial service companies such as Fidelity Investments, Vanguard, and Schwab, as well as many community foundations and some religious organizations offer donor advised funds. While typical assets used to make gifts are cash and appreciated securities, some DAF charity sponsors will accept assets that may not be acceptable to a client’s favorite charity.
Why Are Donor Advised Funds So Popular?
Receive a needed tax deduction in a year with increased income. For clients who experience a financial event in a given tax year that generates substantial taxable income, an income tax deduction in that year may considerably reduce their tax burden. By establishing and funding a donor advised fund, the client will generate an immediate income tax charitable deduction, potentially making it advantageous for the client to itemize deductions rather than using the standard deduction. This scenario can work well for a client who receives a substantial bonus from an employer, completes the sale of a business or a piece of real estate, or who converts a traditional IRA to a Roth IRA.
Use an illiquid asset to make a charitable gift. With increasing frequency illiquid assets are being used to make transformative charitable gifts. These assets usually have appreciated substantially and carry capital gain tax liability to the donor. A typical example is real estate, which many charities are reluctant to accept due to the potential liabilities that such gifts may incur on the charity. Some donor advised fund sponsors are experienced in accepting and selling such assets. The proceeds of sale are added to the donor’s fund for distribution to those charities suggested by the donor when the donor so wishes. Other examples of such assets are art, collectibles, and even some non-publicly traded securities and investment interests.
Family engagement. More families are relying on their advisors to guide them in establishing a vehicle so that philanthropy can become a family tradition. Parents engage children of all ages in a discussion to decide which charities the family wants to support. The family, as a unit, can suggest grants from their donor advised fund to the charities the family has agreed to support. Some sponsoring charities will allow a fund to exist for younger generations of family members to carry on family philanthropy.
Clients want advisors who are problem solvers. As clients search for strategies to maintain their charitable giving when they may no longer be itemizing their deductions, advising them of the benefits of donor advised funds might be just the solution to the client’s problem.