Donor-advised Funds: The Fastest-growing Vehicle For Charitable Giving
Thanks to the generosity of Dan and Jill Francis, hundreds of children in ohio have been given a critical head start in life.
DAFS are becoming popular because of the flexibility they offer donors to fund and administer their philanthropy.
After selling their interest in a family business, the retired couple from Sidney, Ohio, used some of the proceeds to help put more than 700 low-income children through preschool. The Francises were inspired to give back after Dan’s sister, a kindergarten teacher, told him about the number of children in her class who were already falling behind.
“Providing early education for kids is one of our country’s major social challenges,” said Dan, citing research showing that a preschool education raises long-term academic performance and earning power, especially for kids from disadvantaged backgrounds.
The couple offered their support through a donor-advised fund (DAF), one of the fastest-growing charitable-giving vehicles in the U.S. today that’s also simple, flexible and tax efficient.
Donors make an irrevocable donation of cash, securities or other assets to a public charity that sponsors a DAF program. The donor is eligible for an immediate tax deduction, and the donation can then be invested and grow tax-free. At any point, the donors can recommend which Irs-qualified charities will receive the funds.
Using the funds from their DAF, the Francises worked with the school district in Ohio to start a public preschool, and then with the Child Care Network (CCN), a nonprofit that provides preschool scholarships for lower-income families suffering from homelessness or crises.
Tax Advantages Of Not Using Cash
In addition to cash, a DAF can be funded with many different assets such as stocks, mutual fund shares, Bitcoin, private equity and hedge fund interests, real estate and even more complex assets, such as privately held C-corp and S-corp shares.
Contributing long-term appreciated assets directly to a DAF is a tax-smart approach that benefits the donor in two significant ways: First, the donor may qualify for an income tax deduction for the fair-market value of the asset. Second, the donor may be able to minimize capital gains taxes, up to 23.8 percent, figuring 20 percent for federal long-term capital gains taxes, plus a 3.8 percent Medicare surtax. This can provide a significant advantage over selling the assets and then donating the after-tax proceeds to a charity.
Donating long-term appreciated securities and letting the investments grow for 10 years enabled the Francises to provide an additional $170,000 to CCN. That meant they could help 79 more children.
“We didn’t want to do one big gift and walk away,” Dan said. “We wanted to find the area where our money could have the greatest impact over time. There’s just no question that our [DAF] has allowed us to do more good than we could have without it.”
Boosting Your Giving Impact
DAFS are becoming popular because of the flexibility they offer donors to fund and administer their philanthropy, and people are finding a variety of ways to use DAFS to increase the impact of their charitable giving. Here are some options:
• Establish a DAF before you retire. If you want to focus on philanthropy in retirement, creating a DAF well before can have a number of benefits. For example, making a large donation to a DAF today can reduce your current taxes more than if you make
a series of smaller gifts in retirement when you’re in a lower tax bracket. The charitable contributions to your DAF can be invested for tax-free growth until you’re ready to focus on philanthropy. According to Fidelity Charitable®1, 62 percent of DAF donors start a donor-advised fund to sustain their giving in retirement.
• combine a DAF with your other giving. There are advantages to complementing a DAF with other charitable-giving vehicles you’ve already established, such as a private foundation, charitable remainder trust or charitable lead trust. For starters, charitable deduction limits when contributing long-term appreciated assets to a private foundation are generally lower than those for a DAF. With a DAF, you may be eligible for a tax deduction for the fair market value of the asset, subject to a limitation of 30 percent of your adjusted gross income, versus 20 percent if that same gift is donated to a private foundation.
• create a beneficiary of a trust. Some people maintain a charitable remainder trust or a charitable lead trust at the same time as a DAF. If you couple the trust with a DAF, like the Giving Account® from Fidelity Charitable®, you can make Fidelity Charitable® a beneficiary of the trust. In that way, you won’t have to pay an attorney to update the beneficiaries of the trust over time as you decide which charities to support, significantly reducing your paperwork and administrative chores. With all these advantages, and the ability to establish an account with as little as $5,000, it’s no wonder DAF contributions have reached an all-time high; according to the National Philanthropic Trust 2016 DAF Report2, grant-making from DAFS to qualified charities jumped nearly 17 percent between 2014 and 2015.
DAFS are a great way to enjoy a significant tax benefit today, while making a huge impact on the world now and well into the future.