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Donor-advised funds sidestep tax constraints

Philanthropists are taking a fresh look at donor-advised funds—investment accounts used for charitable giving. This heightened interest is due, in no small part, to the Tax Cuts and Jobs Act of 2017, which greatly reduced the number of individuals who could claim a deduction for charitable giving.

Elizabeth Thorley

Elizabeth Thorley

“In the past when you made a charitable deduction, you were able to itemize,” says Elizabeth A. Thorley, CEO and president of Thorley Wealth Management. “Now because of the higher standard deduction many people can’t itemize, so they lose the ability to deduct charitable contributions.”

A donor-advised fund allows individuals to maximize the tax benefits of charitable giving by bundling—making several years’ worth of charitable donations in the same year to get the total combined amount of itemized deductions.

But the Tax Act of 2017 alone doesn’t explain the growing popularity in donor-advised funds: New DAF accounts have been increasing for the past nine years, according to The National Philanthropic Trust, a nonprofit that advises donors, foundations and financial institutions. The Trust, which collected financial data from 989 charities from 2014 to 2018, found that in 2018 individuals gave grants from donor-advised funds totaling $23.42 billion. That same year, the number of new DAF accounts increased 50 percent.

How it works

Donor-advised fund accounts, also known as DAFs, are easy to set up—you make a gift of cash, stocks, bonds or property by transferring your assets to a tax-exempt sponsoring organization, such as a public charity. This qualifies you for an immediate federal income tax charitable deduction for the full value of the gift.

DAFs also afford flexibility—there are currently no rules dictating how much you must spend from your account over a given time period, says Amy Libenson, director of planned giving and endowments for the Jewish Federation of Greater Rochester. Some donors spend the funds quickly and replenish them, while others let the money sit and grow tax-free until they are ready to pay it out. Either way, you receive an immediate tax deduction.

Julie Marsiglio

Julie Marsiglio

“Some individuals put a large sum of money in a DAF to get a tax break,” says Julie Marsiglio, director of major gifts at the United Way of Greater Rochester. “Then you can make several grants from that fund.” And if you do spend down the money, you can build it up again.

Because of its ease and flexibility, some philanthropists prefer a DAF to creating a private foundation.

“Setting up a private foundation is much more expensive and involves legal work,” Thorley says.

Rochester has many public foundations where it is possible to establish a DAF, including the Rochester Area Community Foundation, the United Way of Greater Rochester, the Jewish Community Federation and the University of Rochester.

The Community Foundation staff can set up a DAF in less than an hour, says Jennifer Leonard, president and CEO. “There is no set-up fee; we can invest your donation in a permanent endowment in your name or the name of your choice.”

How much money do you need to start a DAF? That depends on the sponsoring organization. There is a minimum investment of $5,000 at the United Way; it’s also $5,000 to start a DAF at the Jewish Federation; and $10,000 at the Community Foundation.

“Just about anyone can set up a donor-advised fund,” says Thorley. “To me, it’s not just for the ultra-wealthy.”

Because the administrative costs of setting up a DFA vary from company to company, Thorley advises donors shop around.

“It’s like opening a CD,” she says. “You can go to three different banks and get three different interest rates.”

The IRS code dictates that DAF donors can only recommend where they would like their money to go, but foundation executives say donors are typically allowed to direct where their gifts are distributed—within certain parameters. For example, the nonprofit organization must meet the public charity classifications under the IRS Code.

At the Community Foundation, staff also ensure “donors don’t unknowingly make grants to defunct organizations or for non-charitable purposes.”

“You also want to make sure your money is going directly to help the [nonprofit]—not to overhead,” says Thorley.

Many philanthropists are happy to learn where their money will do the most good.

Says Libenson: “Sometimes organizations ask us for help in fundraising, so I will reach out donors interested in that area and help match their interests.”

A DAF is a particularly good option, says Thorley, for baby boomers who have accumulated assets and want a lasting way to support their favorite charities. With a DAF, “they can continue to give to their community after they are gone,” she says.

Drawbacks

A donor-advised account does not meet everyone’s needs. Because a donor receives an immediate tax benefit for the contribution, he or she cannot get the money back—for any reason. It’s a completed gift.

There is also the matter of how you like to allocate your giving. The DAF makes sense if you want to distribute charitable donations over time, says Thorley. “If it’s a one-time interest, you might just want to give the money directly to the charity,” she adds.

It is the flexibility of being able to keep your money in an account over an extended period of time that has led some in the greater nonprofit community to criticize the DAF; they say the money should be released more quickly to those who really need it.

Whether a donor-advised fund meets your giving needs, philanthropy experts agree it is a form of sharing wealth that is gaining popularity.

Amy Libenson

Amy Libenson

The Jewish Federation has seen a 5 to 10 percent increase in DAF accounts over the past few years, says Libenson. “People are thinking a lot more in terms of their tax consequences.”

Although they have been around for years, many people are unaware of donor-advised funds, says Julie Marsiglio. “People are digesting the tax laws to see what works for them in their giving. People are just starting to get their arms around it.”

Donor-advised funds are one option to get your arms around it, but do your research to make sure it’s right for you.

Donna Jackel is a Rochester-area freelance writer.

 

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