Donor-Advised Funds: Charitable Tax Benefit Today & Legacy For Years To Come
November 25, 2020
By: Brian Hungarter, Wealth Advisor, Girard Advisory Services, LLC
In a year where the need for holiday cheer is at a highpoint, it’s finally that magical time of year. While the logistics of celebrating may look slightly different in 2020 as compared to years past, one thing that holds true is our collective resolve and determination to do good by each other. That said, we all know the end of the year tends to be a hectic time.
If you are interested in helping out those in need during the holiday season, creating a family legacy and/or common discussion piece for holiday gatherings, or merely just reducing your impending income tax bill, there is an existing solution that can help decrease some of the chaos at this busy time of year.
A Donor-Advised Fund (DAF), is a tax-exempt account designated specifically for charitable giving. Assets contributed to a DAF can be invested similarly to any other investment portfolio with DAF assets potentially growing tax-free for the duration of the DAF. U.S. citizens can either create a DAF of their own or contribute funds to an existing DAF (thus becoming a donor). Contributions to a DAF may be made with either cash or securities or real estate, with slightly different tax ramifications for the donor.
Now that we have defined a DAF, let’s discuss why it might be a good idea for you and your family.
INCOME TAX BENEFIT
To get the dollars and cents out of the way, from purely an income tax standpoint, contributions to a DAF are no different than direct contributions to a charity of your choice. Aside from giving to a DAF, individuals may still be able to take advantage of the new $300 annual deduction for charitable gifts or they can itemize deductions for potentially greater tax savings.
The primary difference (and benefit) to giving through a DAF as opposed to a direct charitable gift comes via timing and flexibility. DAF contributions avail donors to income tax deductions in the year funds are contributed to a DAF. In other words, if you contribute assets to a DAF in 2020, you may get an income tax deduction for the 2020 tax year (seems obvious, I know).
BUT, and herein lies the flexibility, donors do not need to distribute DAF contributions in the year the contribution is made. Rather, donors can complete charitable grants from a DAF at any time, regardless of when the original contribution was made. In other words, you can contribute funds to a DAF in 2020, but not make charitable grants until 2021, 2022, 2036, 2084, etc.
Perhaps a donor is unsure about which charities to assist. Maybe the donors have questions or reservations about their favorite charity and would like those questions/reservations to be resolved prior to making further donations. Both situations can be resolved with a DAF, while still obtaining the relevant tax benefit now. Depending on your personal tax situation, the ability to front-load DAF contributions and receive an accelerated tax benefit can be a gamechanger. Your Girard Advisor will work collaboratively with your CPA or tax preparer to determine optimal DAF contributions for any given year.
LEVERAGED CHARITABLE GIVING
As mentioned before, DAF assets are exempt from taxation, similar to the concept of a Roth IRA or 529 Plan. Through the power of compounding returns, tax-free growth of DAF assets can allow designated charitable funds to accumulate more rapidly than assets similarly held in a taxable investment account. Investment growth within a DAF may allow a donor to either increase the scope of their annual charitable giving or provide the same level of annual giving with less and less annual cost to the donor. For this reason, some donors choose to “frontload” a DAF, or make multiple years’ worth of contributions in year one of the DAF, allowing investment returns to supplement their own charitable efforts.
Another primary benefit to utilizing a DAF structure is the ability to create a family legacy of giving. Parents and grandparents can utilize the grant making process as an all-inclusive family activity, encouraging younger generations to both embrace family ideals and research/support causes interesting to their personal ideals as well. Donors can name multiple co-advisors and/or successor advisors to directly participate in the grant-making process and continue the cycle of giving for multiple generations. Next-generation advisors might also learn a thing or two about investment management and budgeting in helping with the DAF management process.
The primary limitations on DAF assets are twofold:
First, all DAF contributions are irrevocable gifts. Donor’s cannot reclaim assets transferred to a DAF, as those assets are treated as having been given away for tax purposes and are now outside of the donor’s taxable estate. It’s important to give an appropriate amount within the confines of your wealth plan. Your Girard advisor will work collaboratively with you and your CPA to determine this optimal funding amount for any given tax year.
Second, funds contributed to a DAF may only be distributed to active 501(c)(3) charities in good standing. If your favorite charity is not a 501(c)(3) entity, or they find themselves in legal trouble for one reason or another, those hurdles may preclude grants being made in their favor. The good news, as a donor, you are not required to make this determination. The custodian of your DAF (Univest Foundation*, for example), is responsible for assisting in this due diligence effort to ensure that charitable grants do not wind up in the wrong hands.
If the concept of a Donor-Advised Fund seems intriguing or potentially beneficial to you and your family, there is still time to make a contribution to a DAF this year representing a year-end income tax planning opportunity for charitably inclined clients. Reach out to your Girard Advisor today to discuss next steps.
*Univest Foundation is a non-affiliated 501(c)3 organization that sponsors DAFs. Univest Foundation works closely with your Girard Advisor to set up and maximize your DAF. With the mission to help you realize your philanthropic potential Univest Foundation manages all the details of your DAF.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.