Now Is a Good Time to Start a Donor-Advised Fund

A donor-advised fund (DAF) can be one of the best ways to align tax planning with charitable intentions. Particularly if you are having or anticipate a high-income year ahead, or you plan to make a rebalancing move that will generate capital gains, a DAF may be a good option for accomplishing two goals at once.

DAFs have exploded in popularity, with total amounts contributed in 2018 reaching over $37 billion according to the National Philanthropic Trust 2019 report.

Advantages of Donor-Advised Funds

DAFs have tax and non-tax advantages. They allow donors to manage the timing of their tax deduction on multi-year commitment. Since the DAF is housed in a public charity, you receive an immediate income tax deduction in the year you contribute. (Cash donations are deductible up to 60 percent of adjusted gross income and donations of appreciated assets are deductible up to 30 percent of AGI.)

If you donate more than you can deduct, do not despair; you can carry forward unused deductions for five years. When you donate appreciated assets (such as securities), you will incur no capital gains tax on gifts. The charity incurs no gains tax either on the sale of these assets and the fund can grow tax-free.  Also, contributions to a DAF remove assets from your taxable estate.

DAFs are a great alternative for those considering a private foundation. Foundations take longer to set up, are more expensive to establish and administer, have more stringent rules regarding gift deductibility and a small annual tax, have a required minimum annual grant amount and have public filings.

As with a foundation, a DAF allows parents to pass on charitable values to their kids, whether it gets them involved now or later, or create a family charitable legacy for the next generation.

Donor-Advised Funds Have Some Critics

Critics of DAFs say they capture funds that otherwise would go to the end charities. They also point to the fact that they do not have a requirement to distribute (like foundations do), so they essentially serve as holding accounts for those seeking tax deductions but without the charitable benefit. They also point to potentially high management fees.

Our Thoughts

We think people should create a DAF only if they have a true charitable intent to distribute the funds. The ability to make, for example, a multi-year commitment to an organization but capture the deduction in an advantageous year is just combining smart tax planning with your charitable giving.

Also, since it is quite common to use appreciated assets to fund DAFs, there are contributions that may otherwise not get made because it is easier for some people to part with appreciated stock than cash. In addition, because many smaller organizations are not set up to receive gifts of stock, it is common to donate to a DAF and then follow up by directing grants to that organization.  In the high-net-worth space, many donors use a DAF as a private foundation alternative.  Since the data suggest that the distribution rate from DAFs has been four times that of the 5 percent requirement of private foundations, we believe the funds in DAFs are getting to end charities. Finally, as to costs, we suggest you shop wisely, as you should do with anything.

How Do I Start a Donor-Advised Fund?

You can start a DAF at many large charities, including community foundations, or at many brokerage firms through their foundations. It may take a week or so to open. Some sponsors can start at as little as $5,000 and others may start at $100,000 or more. In order to have more flexibility with the investments, including use of your own adviser to manage the funds, the minimums will be higher.  Be sure to first check with the fund sponsor to make sure that your favorite charities are on their donor list. You can usually do this on the sponsor’s website.

Why Now?

With the U.S. stock market indices at or near record highs, many portfolios have highly appreciated assets. In addition, we are likely to see tax reform under President-elect Biden’s leadership which could bring increased income tax rates. Whether “now” means 2020 because it is a high income year for you, or next year because potentially higher tax rates make your deduction more valuable, when you combine the tax benefits with the ever-growing need of so many outstanding charitable organizations, this could be an excellent time to start a donor-advised fund.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.