Charitable Giving: Exploring Donor Advised Funds

October 25, 2018 11:56 am

Kristina M. Mello, MBA

Financial Planner and Compliance Associate

Following the passage of the Tax Cuts and Jobs Act (“TCJA”) last year, and the increase in the standard deduction that came with it, there’s a lot of industry discussion about the impact that this may have on charitable giving. Many of us give to charities for reasons beyond receiving a tax deduction. However, there is concern that the overall figures given could drop without the incentive. Ultimately, we will have to wait to see if these fears come true.

Due to the change in tax policy, you may start to hear more about donor-advised funds from the media and/or your accountant. These aren’t new vehicles: the ability to support your favorite charity using a donor-advised fund has been around for years. In fact, even prior to the passage of the TCJA there has been rapid growth in the usage of these funds, and we expect that trend to continue.  Whether you have a vague idea of what you want charitable giving to look like or you have a specific organization in mind, you may want to consider opening a donor advised fund.

Benefits of a Donor Advised Fund
A donor advised fund (“DAF”) is a charitable investment account, designed to accept various types of contributions in order to support the charitable organizations you care about. DAFs allow clients to make irrevocable charitable contributions to the account, but grants do not need to be issued upon receiving the contribution. Once a contribution into a DAF is made, the donor can immediately claim the federal income tax deduction at that time. The funds, however, can remain in the account and continue to grow until the donor is ready to issue a grant to a qualifying 501(c)3 organization.

This may be particularly helpful for clients looking to exceed the new federal standard deduction. For example, clients are able to make one lump sum contribution into a DAF to push them past the threshold of the new standard deduction. They can issue grants on their own timetable, however, spreading this out over several years if desired, and control when their recipients actually receive their gifts.

If you are someone that likes to donate annually, maybe around the holidays, this can still be done without changing your gifting behavior while still allowing for you to capture the maximum tax benefit in a given year. In addition, DAFs are generally able to accept non-traditional assets as contributions, expanding your options as to what you can pledge for a donation. This flexibility allows clients to maximize their personal tax strategy while also accomplishing their philanthropic goals.

Donor advised funds provide a valuable planning strategy, allowing you to easily organize your charitable giving. By creating a centralized giving platform, clients can easily track their gifting history, plan for upcoming gifts, and access gift receipts all in one place.

Which Charitable Vehicle is Right for You
There are, of course, many other options for charitable giving available. These include, but are not limited to, endowment funds which are established to support a local community or other specific cause, or gifting funds directly to a charity. When deciding which vehicle is right for you, consider what is most important: Is it flexibility to choose your grant recipients each time you make a donation? Or you do you feel passionate about giving back to certain areas of your community and leaving a legacy in the name of a fund? Perhaps tax strategy is a top consideration, or operational ease is something very important to you. Other differences you will encounter among these products are: account minimums, fees, and asset allocation options for the funds within the account.

Asking yourself some basic questions will help narrow down your options. DAFs generally offer the most flexibility with lower account minimums, whereas endowments are usually specific to areas of a community. You can always choose to gift directly to the charity by donating cash or stock. However, working with your charity’s broker directly can put the operational onus on you to facilitate the gift. By opening a donor advised fund you can issue a check to your charities of choice whenever you’d like, electronically.

Other Considerations
As Chrissy Canapari explains in her blog, there are no shortages of organizations that need financial help. When unexpected tragedy strikes, most people feel charitably inclined to donate to the cause. By having a funded DAF, you can easily make a charitable donation even if the event occurs during your non-traditional time of giving.  As always, it is important to vet your desired recipients to ensure they are legitimate organizations. The link provided in Chrissy’s blog is a good resource to research your charity of choice.

 

For further information on understanding the mechanics of these products and opening an account, contact your financial advisor to discuss your charitable planning strategy.

 

Kristina Mello, MBA serves as Financial Planner and Compliance Associate at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at kmello@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Kristina’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.