Tis (Almost) the Season

Published On: October 26, 2021

Written by: Ben Atwater and Matt Malick

As we approach the holidays, many of our clients begin thinking about charitable giving, both for altruistic reasons and for year-end tax planning purposes. Some create a donor advised fund (DAF) to achieve their philanthropic goals.

A DAF is a charitable investment account with the sole purpose of supporting not-for-profit organizations. When you contribute cash, securities or other assets to a donor-advised fund, you are generally eligible to take an immediate tax deduction. However, while you earn the tax deduction in the year you contribute to the DAF, you can invest the money within the DAF and make grants to charities in the future. It is important to know gifts to DAFs are complete and irrevocable.

For example, consider a client, Jane Doe, age 62, who plans to retire at the end of 2021. She will have $250,000 in adjusted gross income in 2021, has a $1.5 million 401(k) and a $2 million taxable brokerage account that has appreciated significantly over the years.

Jane wishes to support various charities throughout her retirement years. Jane decides to contribute $75,000 of appreciated stock from her taxable brokerage account to a DAF. Because of this large gift, she will itemize her deductions and claim a $75,000 tax deduction in 2021, her last year with significant earned income, while sidestepping the unrealized capital gains from the stocks she donates. (Rules limit the tax deduction for giving appreciated stock to a public charity with a DAF program to 30% of adjusted gross income, but the IRS allows a five-year carry-forward for unused deductions.)

We can work with clients to determine the best assets to seamlessly contribute to the DAF, often appreciated stock, and we can also help Jane invest her DAF. Furthermore, we will assist her in making annual grants to charities over her retirement years.

Both of our primary custodians, Charles Schwab and Fidelity Investments, operate donor advised funds via their charitable entities, Schwab Charitable and Fidelity Charitable. Both are independent public charities and allow clients to easily recommend grants to thousands of operating charities directly from their website or smartphone app.

Schwab and Fidelity also allow donors to name their DAFs (e.g., The Human Fund) and allow donors to make gifts anonymously or include the fund name and your contact information.

Both charities perform basic due diligence to ensure you give to registered 501(c)(3) organizations. In fact, we typically confirm that a client’s favorite charities are eligible before establishing the DAF.

And the recordkeeping is easy. There’s no need to contact each charity to see if they have a brokerage account and can receive stock gifts. And instead of making many small gifts to various charities each year and documenting each gift for tax purposes, Schwab or Fidelity will send a single letter to document your charitable contribution.

If clients want to keep their giving more local and plan most of their philanthropy in their community, we can introduce them to local donor advised fund sponsors, like the Lancaster County Community Foundation. A community foundation can offer many of the same conveniences as Schwab or Fidelity but can keep your dollars local. In this case, the fees you pay to the sponsor will help support philanthropy in your community. Additionally, you can leverage a community foundation’s expertise on the needs and opportunities in your backyard.

Lastly, certain larger charities, for example, ones with national reach, not-for-profit health systems and universities, sponsor their own DAF programs. Giving to these DAFs usually allow donors to then recommend grants within the organization’s footprint and sometimes even allow for limited recommendations outside the organization. However, clients should primarily select these sponsors if their giving is focused on one charity.

DAFs may not be suitable for every client and in every situation. For instance, for clients who are age 70 ½ or older, qualified charitable distributions (QCDs) may make more sense. For other clients, a bequest in a will or even a private foundation may be the answer. But we have found that DAFs are appealing to many clients because of their tax advantages, flexibility and ease of use.

If you’d like to discuss your philanthropic goals and whether a donor advised fund is practical for you, please do not hesitate to contact us.