Giving to a charity should be simple. But for wealthy families it’s anything but. Even beyond major tax implications and a new set of rules under the Tax Cuts and Jobs Act that were effective last year, charitable giving has become a cornerstone for defining family values and educating future heirs.
Donor-advised funds have become an essential tool for achieving these goals. Even as overall charitable giving declined 1.7% to $427.7 billion in 2018—the first drop after four years of growth—giving through donor-advised funds increased significantly. For example, Fidelity Charitable, Vanguard Charitable, and Schwab Charitable—three of the nation’s largest nonprofit organizations that maintain donor-advised funds for individuals—saw double-digit percentage increases in giving last year.
These funds operate like personal gifting accounts managed by a nonprofit organization, much like a personal IRA is housed within a bank. Donors can transfer assets into a donor-advised fund and take a tax deduction for the value of the assets, but the assets don’t have to be contributed to charity immediately. Assets can be invested within the donor-advised fund and gifts can be made over future years.
Many folks prefer donor-advised funds over gifting from private foundations because they are cheaper and easier to set up and maintain. There are no start-up costs to donor-advised funds, and annual fees—administrative and investment expenses combined—can be well under 1%. In contrast, legal fees will be charged to set up a foundation, and annual administrative and management fees can run well over 3% a year.
Donor-advised funds also provide philanthropic privacy—gifts can be made anonymously from a fund, while foundations must file public tax returns. What’s more, the financial benefit of making an upfront gift and then distributing it over years through a donor-advised fund got a boost under changes to the tax code that went into effect in 2018. The law essentially doubled the standard deduction to $24,000 for couples filing jointly and $12,000 for singles, causing the value of charitable contributions to be eroded or lost. To avoid this, taxpayers have been bunching future years’ gifts into a single more significant upfront donation to a donor-advised fund, from which they can make future contributions.
For wealthy folks who tend to give far more than the standard deduction, there’s another timely reason for why they’re giving to donor-advised funds: After many years of economic expansion and a bull market in stocks, many investors are sitting on highly appreciated assets, says Phil Cubeta, assistant professor of philanthropy at the American College of Financial Services.
By transferring appreciated assets to a donor-advised fund, you get a charitable deduction equal to the value of the shares and avoid incurring capital gains taxes on a potential future sale of the stock. These funds can be a good staging area for wealthy families to teach their kids about money and financial values. By assigning assets to charity with no urgency to distribute them, younger members of the family can easily be given responsibility for overseeing a portion of assets by researching charities and designating how assets are to be distributed.
There are three types of donor-advised funds: national funds such as Vanguard Charitable and Fidelity Charitable; community foundations such as the Delaware Community Foundation and Whitefish Community Foundation in Montana; and single-purpose funds such as the Jewish Federation. Administrative fees vary. For example, Vanguard Charitable’s fee ranges from 0.05 to 0.60 percentage point.
Minimum investments for donor-advised funds typically start at $5,000. “Most of the donations we get are cash and appreciated securities, but illiquid assets can also be contributed, such as private securities, hedge funds, and real estate,” says Jane Greenfield, president of Vanguard Charitable.
When sizing up donor-advised funds, consider their unique constraints or requirements. For example, some community foundations will require that a certain percentage of assets go to charities directly benefiting the community. Other funds set requirements for gifting activity over a certain period.
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Barron’s Online
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