Tis the Season for Donor-Advised Funds

Ken Nopar, American Endowment Foundation
October 29, 2018

With the peak charitable giving season just around the corner, it is again time for many Americans to begin planning which charities they wish to support, how much they want to donate, which assets to donate and whether they should give directly or through a donor-advised fund (DAF) or other charitable vehicle.

Many different types of donors have established DAF accounts in recent years, including those who:

  • Have sold or are about to sell a business or other asset and who wish to minimize capital gains taxes
  • Create a DAF to get their family involved in charitable giving
  • Are approaching retirement want to donate to a DAF during their high income-earning years so they can receive a large tax deduction and then send donations from their account during their retirement when their income is less
  • Want their giving to continue for years after their death
  • Have highly appreciated stock or mutual funds that the advisor and client are considering selling anyway and can be donated to a DAF instead, thereby often allowing the advisor to manage these assets

Though the percentage of overall charitable giving has remained consistent, you may have noticed a huge increase in the number of donors at many levels of wealth who have established donor-advised funds. Donor-advised funds have often been described as charitable checking accounts in which donors make irrevocable contributions to a DAF sponsor and then send out donations from their DAF account to their favorite charities. There are now 300,000 DAFs throughout the country, which is twice the number available just eight years ago.

There are a number of reasons why DAFs have grown in popularity:

  • They are simple to establish and there is no charge to do so.
  • Because DAF sponsors are charities themselves, donors receive the maximum tax deduction allowed by the IRS, greater in many instances than donations to private foundations.
  • Once the DAF account is established, donors can recommend grants to numerous charities online, similar to bill paying from a bank account.
  • Donors receive one tax receipt for their donations to the DAF sponsor, instead of numerous tax receipts they would have received from different charities they supported in the past.
  • Donors’ financial advisors are often able to establish and manage the investments in their DAF accounts, and these investments grow tax-free.
  • Besides cash, donors can contribute publicly-traded stock and even more complex assets that many charities cannot accept, such as privately-held stock, real estate and LP or LLC interests.

Because of the recent tax changes and the doubling of the standard deduction, many tax and financial advisors are recommending that their clients “bunch” several years of current and future charitable donations into a DAF this year, receive a significant tax deduction now, and in future years take the now-higher standard deduction and make grants from their DAF accounts to their favorite charities.

Financial advisors can get ahead of the year-end rush and discuss charitable planning this year and in the future with their clients. This discussion could be very beneficial to both and the causes and charities in which the clients are most interested and involved.

 

Ken Nopar is the Senior Philanthropic Advisor for American Endowment Foundation (AEF), the country's leading independent DAF sponsor for 25 years. AEF uniquely allows advisors to manage the assets in their clients' DAF accounts at all levels.

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