Philanthropic Planning
Donor advised funds: the Swiss Army knife of charitable planning.
By Bryan K. Clontz, Ph.D., CFP®, CLU®, ChFC®, CAP®, AEP®, RICP®, CBP - Special guest author
Donor advised funds (DAFs) are a longstanding and versatile tool for charitable giving. However, many charitably inclined people (and even some financial and tax professionals) do not know they exist or why they are so popular. The flexibility of DAFs means that they can achieve many different goals and have significant benefits for charities and donors alike. This article gives an overview of DAFs, including the history, status, planning options, and applications of the vehicle.
To begin with - what is a DAF? The IRS states in a straightforward manner that it "is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization."1 Simply put, it is an individual fund owned and maintained by a public charity, which is funded by an individual donor (or sometimes multiple donors).
Since the contributions to the DAF are charitable, the donor no longer has legal ownership or control, although he or she "retains advisory privileges with respect to the distribution of funds and the investment of assets in the account."2 The investment of DAF assets means that they can grow over time before eventually being granted out with the advice of the donor. Of course, that same contribution is generally tax deductible, since the asset is being given irrevocably to a charity.
A Brief History and Current Status of DAFs
The first donor advised fund is usually credited to the New York Community Trust in 1931.3 Compared to modern DAFs, the fund was unregulated and administered similarly to other charitable funds at then-contemporary community foundations.4 The category of DAFs was further distinguished from other charitable funds (particularly private foundations) in the Tax Reform Act of 1969. That reform added strict regulations for private foundations, which were often created by individuals or families. Public charities, meanwhile, maintained a certain degree of latitude in their operations.5 Since DAFs are always administered and maintained by public charities, this opened the door for the use of DAFs rather than private foundations.
However, in the early 1990s, large brokerage houses began establishing standalone DAFs as independent charities.6 In the decades since that time, DAFs have grown in popularity to the point where they are among the largest charities in the United States.7 Nearly every large bank, brokerage house, community foundation, and Jewish federation offers a DAF option. By 2018, over $120 billion in assets were held in DAFs.8
The incredible growth of DAFs applies across seemingly every metric. This includes the number of individual funds, the total dollars granted out from DAFs to other charities, the total contributions to DAFs, and the total assets held in DAFs.9 This growth has drawn scrutiny and criticism from inside and outside of the charitable world, usually driven by a perception that the charitable dollars are sitting within the DAF structure and not being deployed for charitable purposes.10 DAF supporters respond that annual grants from the funds are typically about 20% of total assets.11 Further, they argue that DAFs allow for more participatory, democratized charitable giving - making long-term charitable planning and growth available to donors of all backgrounds. Regardless, DAFs appear to be here to stay, considering they are the "fastest growing form of charitable spending" in the country.12
DAF Planning
When can a DAF be a useful option for someone who is charitably inclined? How can a budding philanthropist deploy a DAF? There are a number of situations where a DAF may be a wonderful solution.
Any time a person has a large spike in income is usually a good time to consider charitable giving. The reasoning is twofold. First, a spike in income means that the donor in question has more income than usual and may be more able to make charitable donations. Secondly, higher income usually means higher taxes, so a donation makes more sense from an accounting perspective - the deduction is often more valuable in high income years. Funding a DAF during such a time can allow for many years of charitable giving following the higher-income year.
Similarly, a person with highly appreciated noncash assets can utilize that illiquid portion of their balance sheet for tax efficient charitable giving. Donating cash is simple, but appreciated assets given to charity means that the donor is not paying capital gains on the appreciation - simply because they contributed the asset to a tax-exempt organization. If the DAF is able to accept the noncash asset (not all can or will), it will usually sell the asset, which can then be reinvested or granted out just like a normal DAF funded with cash or public stock.
The DAF can be a wonderful solution for donors considering a very long term, multigenerational charitable plan. DAFs can and do change advisors over time within families. As discussed above, the DAF has advantages over a private foundation, but it can also provide the collaborative, long-term charitable experience that some families look for. Nearly every DAF has simple mechanisms to designate successor advisors for individual funds. To a similar end, a DAF can easily be funded through testamentary language in a will. That can be either initial funding or additional contributions (including noncash contributions from the estate, where allowable).
Key Attributes of DAFs
If a donor does create and fund a DAF, what advantages does it offer after the money is in the DAF? How can a donor fulfill their charitable goals? This is where DAFs shine - they are remarkably flexible when it comes to charitable grantmaking.
As discussed above, DAFs can be a long-term charitable fund. This is a major part of their appeal for many donors. Unlike private foundations, DAFs are not required to grant out a set percentage of their assets every year. That means grants can be very small relative to the size of the fund. This may work well for donors hoping to provide small amounts of support for a period of years before making larger grants in the future.
Similarly, DAFs are not endowed funds. Endowed funds are permanent charitable funds that make grants solely based on income and appreciation only - no grants may be made from principal. DAFs are generally not intended to be permanent and are able to make grants from principal (as well as from income and appreciation).
The latitude with grantmaking from DAFs extends to the recipient charities as well - any U.S. public charity in good standing with the IRS is generally eligible to receive a grant from a DAF. In practice this means donors can support the same charities from their DAF that they could support by writing a check. Some DAF sponsors also allow international grants as long as they are to IRS equivalent charitable programs.
Which charities cannot receive grants from DAFs? Most private foundations, foreign charities (except where noted above), or charities that have lost their tax-exempt status. DAFs also will not generally make grants to fulfill the legally binding pledge of a donor, or where the donor would receive some tangible benefit in exchange.
Another advantage is that grants can be made anonymously. Some donors have a strong preference to maintain privacy in their giving. DAFs are typically able to accommodate these concerns by making anonymous grants. Further, a donor can have a DAF without any identifying features or traits.
Conclusion
Donor advised funds are an extremely versatile tool for the charitably inclined. Although DAFs have been around for many decades, they have grown exponentially in number, value, contributions and general popularity over the last twenty years. The funds may be appealing for donors with some combination of appreciated assets, unusually high income, or with long-term charitable goals. This is particularly true given the significant latitude that DAFs allow when it comes to grantmaking.
|
Bryan K. Clontz, Ph.D., CFP®, CLU®, ChFC®, CAP®, AEP®, RICP®, CBPis the founder and President of Charitable Solutions, LLC, specializing in non-cash asset receipt and liquidation, gift annuity reinsurance brokerage, gift annuity risk management consulting, and emergency assistance funds as well as virtual currency and life insurance appraisals/audits. He also serves as Senior Partner of Ekstrom Alley Clontz & Associates, a community foundation consulting firm in Tuscon, AZ. Bryan is the founder of the Dechomai Foundation, Inc. and the Dechomai Asset Trust, national donor advised funds focusing on non-cash assets generally and S-corp transactions respectively. These foundations have raised more than $750 million in noncash gifts. |
Adding flexibility to irrevocable trusts can help address tax law uncertainty.
Estate & Gift
Adding flexibility to irrevocable
trusts can help address tax
law uncertainty
About Integrated Financial
Tulsa, Oklahoma
For over 30 years, successful individuals, entrepreneurs, privately owned companies, foundations, and Fortune 1000 corporations have provided Integrated Financial with daily opportunities to address diverse estate, financial and business planning challenges.
We have developed a process which provides a strategic approach to addressing the important financial and business concerns our clients encounter.
Integrated Financial is the creator of a unique Four-Step process, The Integrated Planning Process™, which assists our clients in gaining clarity and insights as to their Vision and Goals for themselves, their Family, their Business and their Community.
"A Vision without a Plan is a Daydream;
a Plan without a Vision is a Nightmare".
A Standardized Process Leading to Unique Results
"Each of our clients is like a
snow flake; from a distance looking alike; however, up close, all unique and different."
Integrated Financial will be providing timely and valuable insights into topics that should be of interest to the "affluent" client. We will provide you this special Newsletter and future Webinars designed to inform and educate.
Michael is available to answer questions and brainstorm your specific situation.
|
Michael R. Noland |
Integrated Financial
Planning Concepts
