Generosity and Donor-Advised Funds
Good Morning and Happy Friday!
A couple weeks ago we touched on what an extraordinary year 2020 was for many different reasons. Of particular note has been the extraordinary “rise to the occasion” of you, our clients and friends of the firm, as many have stepped forward with generosity and care for others. Despite all of the chaos and uncertainty, we have seen a significant increase in gifting and support to causes near and dear to your hearts, specifically through donor-advised funds. And encouragingly, this is part of a broader movement of generosity in our communities. Schwab Charitable reported specific to donor-advised funds, they had seen a 46% increase in dollars granted and 44% increase in the number of grants to charities compared to 2019 in the first half of 2020 alone. We’ve seen similar numbers reported from other industry sources.
With all of the interest and questions we have received regarding donor-advised funds, I wanted to take few moments to give you a high-level idea of what it is and how it works.
What is a donor-advised fund (DAF)?
A DAF is a charitable giving account that allows you to make an irrevocable contribution of cash, appreciated assets, or investments, receive an immediate tax deduction, and then recommend grants from the fund over time. Donors can make contributions to the fund as often as they like, and then recommend grants to their desired qualified charities on their own timeline. The funds can continue to be invested and grow tax free.
How does it work?
Let’s say you plan to donate $2,000 per year to a qualified charity for the next 5 years. Without a DAF, you would only be eligible to deduct $2,000 each year on your tax return. However, by establishing your charitable gifting through a DAF, you could take a much higher tax deduction in the year you gift into it. By transferring $10,000 into a DAF you’d be essentially frontloading your giving and able to deduct the full $10,000 in the year contributed and then make your $2,000 per year donations to the charity over the next 5 years. Getting a bigger tax deduction in a single year could be much more beneficial in tax planning than smaller deductions every year. Plus, if you contribute non-cash assets (such as stocks, mutual funds, ETFs) held longer than a year, you could potentially eliminate the capital gains tax you be paying if you sold the asset – meaning even more to the charity and less to Uncle Sam.
How do I learn more?
We have been having many conversations with clients exploring whether establishing a donor advised fund makes sense for them. We would welcome the conversation with you or anyone else you think may find it helpful. Please just reach out – we’d love to hear from you!
Thanks,
Kelli
