Build a philanthropic legacy and save money on taxes with donor-advised funds

by Julie Parisio Roy

According to the National Philanthropic Trust, Americans gave $390.05 billion in 2016*, with approximately 91 percent of high net worth households giving an average of $25,509 to charity. There are several ways for individuals to establish a longer-term giving strategy and donor advised funds, or DAFs, offer numerous benefits, especially in light of the recent tax reform.

What is a donor-advised fund?

Donor-advised funds allow people to be strategic about their philanthropy and are a lower-cost way to create a legacy for future generations. As National Philanthropic Trust says, “An easy way to think about a donor-advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charities when they are ready.” When contributing to the DAF, donors receive an immediate tax benefit to the maximum the IRS allows. A good time to consider a donor-advised fund is after a major tax or life-changing event. In addition, a tax savings strategy is emerging out of the recent tax reform to “bunch” donations into one year by contributing those funds to a DAF, and then making annual grants out of the DAF according to your wishes.

Here are some fast facts about the prevalence of donor-advised funds from National Philanthropic Trust (data is from 2016, the latest year available):

• There were 284,965 donor-advised fund accounts.
• Donor-advised funds held $85.15 billion in assets.
• Annual contributions into donor-advised funds were $23.27 billion.
• Donors recommended grants from donor-advised funds totaling $15.75 billion to charities.
• Average donor-advised fund account size was $298,809.

How a donor-advised fund works

1. Donors make an irrevocable contribution to the donor advised fund from their personal assets. Depending on where the DAF is initiated, there may be a minimum initial contribution of $10,000 to $25,000. The DAF can be managed by the donor’s financial adviser.
2. Donors name their DAF anything they’d like and can choose to have their children as advisors and/or successors.
3. Donors immediately receive the maximum tax deduction allowed by the IRS. If you use appreciated securities, the capital gains tax is avoided.
4. Donors recommend grants to qualified charities and nonprofits.
5. Any assets held in the DAF grow tax-free.

What are some benefits of donor-advised funds?

There are several benefits to establishing a longer-term giving strategy using a DAF. These include:

• Tax savings: By investing in a DAF, donors can receive an adjusted gross income (AGI) deduction for cash of up to 60 percent and up to 30 percent for securities. Their investment will appreciate tax-free and reduce the alternative minimum tax (AMT) penalty. Gifts of appreciated assets will not incur capital gains tax. Plus, the DAF is not subject to estate taxes.
• Administrative benefits: Since the sponsoring organization takes care of the paperwork after the initial DAF donation, donors don’t have to worry about handling a lot of administrative tasks in the future.
• Cost savings over private foundations: Donor-advised funds have no start-up costs, whereas private foundations typically require $4,000-$12,000 to begin. In addition, private foundations are typically required to pay an annual excise tax equal to two percent of net investment income. Each year, private foundations must also distribute five percent of the average fair value of its assets while DAFs have no such requirements. 
• Anonymity: Contributions to a DAF are not public, so contributions made to the charitable organization can be made anonymously if desired.

Thinking of establishing a donor-advised fund or developing a more thoughtful charitable giving strategy? Contact us today to start the conversation about where, when and how to go about it.

*Latest data available