by John Curry
Barry and Eugenia Frank of Greensboro, North Carolina, were interested in a simple way to accumulate assets that could fund community college scholarships and grants for medical research.
While familiar with private and community foundations, they sought the convenience and simplicity of a donor-advised fund (DAF) to implement their planning. Barry believed the flexibility of its use and future funding was attractive. “I am very positive as to how this turned out,” he says.
A donor-advised fund is an easy-to-open, low-cost, and flexible account for charitable giving that is a popular alternative to creating a private foundation. Donors can contribute all types of assets to it, including cash, stocks, mutual funds, real estate, and business interests. They receive an immediate tax deduction for their irrevocable donation. When donors are ready, they can offer guidance or advise the DAF administrator on how the money should be used for grants to support their favorite Internal Revenue Service-qualified public charities.
“This is a great tool that is simple and efficient in both implementation and operation,” says Mike Gray, the Franks’ CAPTRUST financial advisor in Raleigh, North Carolina.
Nick DeCenso, CAPTRUST’s manager of wealth strategy, says more clients should consider using DAFs for charitable giving. There are so many positives, he says. “You get to start your own charitable account. You get a tax break, and the money can be invested until you’re ready to gift it, which may be years down the road.”
Anybody who gives to charity on a consistent basis should consider a donor-advised fund, says Brian Deacy, national fundraising manager for Fidelity Charitable, which offers the nation’s largest DAF program. An account can be opened with them with as little as $5,000. There are many other DAF administrators that offer these accounts, including Schwab Charitable, Vanguard Charitable, National Philanthropic Trust, the National Christian Foundation, and community foundations.
Interest in these accounts is skyrocketing. Contributions hit an all-time high of $19.7 billion in 2014, according to the 2015 DAF report from National Philanthropic Trust. There were 238,293 accounts in 2014, with an average account balance of $296,701, the report found.
Donor-advised funds are easier to create and require less money to start and operate than private foundations, Gray says. It takes a lot of legal work to create a foundation. You have to file tax returns each year, and there are minimum payouts that you have to make each year, he says. “You probably don’t want to make the effort required for a private foundation unless you are going to put a million dollars or more into it.”
Donating appreciated securities is considered one of the best ways to fund a DAF. It makes sense in terms of “tax economics,” Gray says. For instance, say you made a $50,000 investment in a stock, and now it’s worth $200,000. If you put the stock in a donor-advised fund, you get an immediate tax break, and you avoid paying taxes on the capital gains. “It’s much smarter than selling the appreciated stock, paying taxes on it, and then giving the cash that’s left away to a charity.”
Once the stock is in the account, you can sell it and invest it in a more diversified manner. You don’t have all your eggs in one basket, and your new investment can grow tax free, he says.
If you donate cash to a DAF, you’re generally eligible for an income tax deduction up to 50 percent of your adjusted gross income (AGI), according to fidelitycharitable.org. If you have long-term appreciated assets — such as stocks, bonds, or real estate — you generally won’t have to pay capital gains, and you can take an income-tax deduction in the amount of the full fair market value, up to 30 percent of your AGI. These are higher tax deductions than you would get for similar contributions to a foundation.
The majority of contributions to donor-advised funds with Fidelity Charitable are made in capital assets, such as publicly traded securities, shares in private business interests, and real estate, which many nonprofits find costly, time consuming, or even nearly impossible to accept. “Somebody even gave a percentage of their ownership in a thoroughbred horse,” Deacy says.
Eileen Heisman, president and chief executive officer of National Philanthropic Trust, says unusual or complex assets, such as real estate, art, coins, and antiques, comprise a large share of some donors’ wealth. “Many large DAF sponsors have the resources and experience to help donors efficiently convert these assets into mission-critical financial support for charities in the U.S. — and even around the world.”
For some people, DAFs have become a family affair. “We have a lot of families who sit down together and decide which charities they are going to support,” says Alanna Linden, president of the National Christian Foundation Raleigh. Then, the parents have their children help them make the grants online.
Some have incorporated DAFs into their Christmas traditions. One family has each child select a charity he or she wants to give $500 to. Then, on Christmas morning they explain why they chose that charity, she says.
Philip M. Savage IV, an estate planning attorney at Gresham Savage in Riverside and San Bernardino counties, California, and chairman of the board for the local community foundation, often works with his clients to set up DAFs as part of their estate planning. You can set up the funds so you and your spouse will be the advisors, and if one of you passes away the other will be the advisor. After you both are gone, your kids can be the advisors. It can help instill the culture of philanthropy in your kids, he says.
Establishing a DAF with a community foundation allows you to give to the local charities you are passionate about, such as a homeless shelter, a library, educational causes, a symphony, or botanical gardens, he says.
Clients who are interested in a DAF should work with their financial advisor to choose the right provider, DeCenso says. “Donor-advised funds can be a powerful tool for the charitably inclined. Most people are surprised to learn the benefits, and many wonder why they didn’t use them earlier.”