Charitable Gifting in a Volatile World

Crises like the ones unfolding in the Middle East and Ukraine often prompt the question of what we can do to help. As part of our ongoing and comprehensive work with clients, we develop giving strategies to provide charitable impact and support to communities they value. Donor Advised Funds are one of the strategies used to provide flexibility when new charitable giving needs arise. In light of recent events, we’re revisiting an article by Daniel Smyth, CFP^®, that highlights the benefits of Donor Advised Funds.

Donor Advised Funds, also known as DAFs, are a simple and powerful tool that can enhance your charitable giving and strategic planning. The primary element to understand is that donors can contribute to their DAF and receive a charitable deduction, and funds can be granted out immediately or over multiple years. This means that contributions can be invested to increase the potential of future charitable giving and granted to organizations when the owner chooses. When you contribute to your DAF, this is called a donation. When you gift money from your DAF to a charity, this is called a grant. This tool empowers you to be more in control and organized with your giving efforts now and as part of your legacy.

The primary reason for charitable giving is to support causes and organizations that are important to you. Beyond the immediate impact of these grants, there are some additional elements to consider when using a DAF.

Organization & Simplification
One benefit of a DAF is that you don’t have to keep track of every gift acknowledgment from every charity you support, which can be a headache at tax time. With a DAF, you only need the receipt from your donor-advised fund contribution. When you’re ready to grant out money to charitable organizations, you can simply log in to your account and make grants to any 501(c)(3) organization. In addition to making one-time grants, you can also set up reoccurring grants to any of your favorite causes or organizations, ensuring regular giving.

Potential for Growth
Once money has been contributed to the DAF, funds are available to be granted out at your discretion. If you do not want to grant funds immediately, the money can be invested for future growth. You may prioritize future giving and opt for an equity-focused portfolio or prioritize stability with a more bond-focused allocation. Like a traditional investment portfolio, it is prudent to check the allocation periodically and update it appropriately as charitable needs and giving goals change over time.

Tax Benefits
Donor advised funds are growing in popularity as they offer additional tax planning opportunities. In 2017, changes to tax law placed a $10,000 limit on state and local tax deductions, including property taxes, and simultaneously increased the standard deduction. As a result, more individuals are taking the standard deduction and, therefore, don’t benefit from an itemized deduction for charitable contributions. This created a new opportunity for DAFs to shine. Using a DAF, a strategy has emerged to fund multiple years of charitable gifting, and in that year, itemizing rather than taking the standard deduction to receive a larger tax benefit. This strategy can also provide a significant benefit during a high-income year, such as the sale of a business, liquidity event, or when diversifying a concentrated stock position. Although the lump sum is donated in a single year for tax purposes, the grants to non-profit organizations can still be spread out over time.

Appreciated Stock

When you contribute cash to a DAF, the tax benefit comes in the form of a deduction on your tax return. If you can donate highly appreciated stock, the benefit is even greater. When donating stock, you avoid paying capital gains tax owed on the sale in addition to receiving a deduction on your tax return. This double tax benefit can allow for larger gifts by allocating more money to charity and less to taxes.

When you contribute to your DAF, it is considered an irrevocable gift to charity. Although you maintain direct control of where money is contributed, the assets no longer belong to you. This means that these funds are not available to you if an emergency or opportunity arises in the future. For this reason, we do not suggest overfunding a DAF or contributing money that you are not willing to irrevocably give away.

There is a specific process when the owner of a DAF passes away, and it is handled separately from any other estate planning documents that are in place. The first and most common option is to elect specific charities that you want to receive the remaining account balance at death. The second option is to name a successor owner for the DAF account. Often, this is the children of the original donor and allows them to step into the role of allocating any remaining funds and carrying on the charitable legacy of their parent or friend.

The DAF, both during life and after, can be a powerful way to engage the next generation in charitable giving as a core value and support the causes that are most important to your family. Clients have used their DAF to create a teaching moment that reiterates wealth accumulation is not only about personal and family well-being, but also contributing to and changing the world that we live in.