The following blog post was originally published in The Wall Street Journal:
Using Donor Advised Funds
As we draw close to the end of the year, a lot of clients are thinking about charitable giving. What charities a client gives to is often a subject near and dear to them. For an adviser, helping a client make those donations in the best way possible is a way to strengthen the adviser-client relationship.
One technique for charitable giving that doesn’t get near enough attention from the advisory community is donor advised funds (DAFs,) which are simple and provide a great tax benefit to the client.
Donor advised funds have been around since the early 1930s. They were created as a vehicle to make charitable contributions. Clients set up the DAF in their name, and donate to the fund while taking a tax write off for that amount. The donor then advises the fund as to where they want those dollars to go.
However, in addition to the tax benefits the primary advantage of DAFs is simplicity. Instead of collecting tax receipts from multiple organizations, clients can collect one tax receipt for the DAF and still contribute to multiple charities. Also, clients can let the fund sit and grow indefinitely, meaning they don’t need to grant funds to charities immediately if they aren’t ready.
If you look at the average donor’s tax return you’ll see that about 90% of contributions are made in cash. But I’ll contend that if clients change the way they give by using a DAF, they can give more.
For example, a lot of our clients in the wealth-management space have appreciated assets, most commonly in stock. If a client purchased $1,000 of stock and now it’s worth $10,000, there is $9,000 of embedded capital gain sitting there.
However, let’s also assume that each year the client gives $10,000 away to charity. The client can donate that stock to the DAF and receive an immediate deduction on the money just as if they had written a check. However, the client won’t have to pay capital gains on that donation. And if they want to continue owning that stock, they can repurchase it with the money they would have given from their checking account.
In this way, the client has reset the cost basis on that stock, and still owns the exact same stock, but still donated. Once that stock is in the DAF, it can be liquidated and the money can be directed to whatever charities the client wants.
There are two things about DAFs that could be perceived as negative. The first is that the client relinquishes control of the money once they make their donation. Also, there are some costs for the ongoing administration of the fund–usually about half a percent to 1% a year depending on the organization that’s running it.
Despite these potential disadvantages, DAFs help advisers create a win-win scenario for the clients to easily support the causes they want to support with financial and tax benefits that the clients weren’t aware of before. And that’s an incredible scenario to create.