There isn’t much the pandemic hasn’t changed in some way, shape, or form.
A year ago, only contractors and medical professionals wore masks. Now I can whip one out of my purse in any color or pattern to match my outfit of the day!
Many industries have been rocked in recent months, and charitable giving is no exception! As an example, giving from Donor Advised Funds (DAFs) shot up 30% in the first half of 2020, as compared with 2019. DAF giving has been trending upward across many demographic groups for years now, and for good reason. But last year, donors met pandemic-related needs in their communities by responding financially in an immediate way. DAFs make that easy to do!
So what exactly is a Donor Advised Fund, and who should consider opening one?
A Donor Advised Fund is dubbed a “charitable checkbook.” It’s an account set up for the express purpose of charitable giving, and the contributor receives a charitable deduction in the year a deposit is made. Funds earn interest until the donor decides where and when grants should be made to their favorite 501(c)3 nonprofit organizations. Grants are quick and easy to schedule, can be for any dollar amount, and can be recurring or one-time-only disbursements. A DAF can also be named whatever the donor or group of donors would like. If I simply want to streamline my charitable giving in one spot, and receive one tax receipt per year, I may set up a personal DAF called the Jenny Nohelty Giving Fund. Or a family, community, or estate may have a donor advised fund associated with it. DAFs are incredibly flexible, and the benefits of opening one are many. Let’s touch on a few ways I’ve seen clients utilize Donor Advised Funds to give creatively during their lifetime, or through their estate plans.
Donor Advised Funds Provide an Immediate Tax Benefit
Case study: George and Linda
One couple had sold their successful medical practice and invested the proceeds in stock, which then appreciated significantly over the years. They were already set up well for retirement, and didn’t need the stock funds to live on. So instead of paying the major capital gains tax that would be triggered by cashing in the appreciated stock, they gifted shares to a DAF when they felt the shares were at a high point. They knew they wanted to give the funds to their favorite medical charity at some point, but it was facing a significant leadership transition, and they didn’t feel like it was the right time to make a major gift. They were able to take advantage of an immediate charitable deduction in the year of the stock transfer and “bank” the higher value of the stock, without needing to rush their charitable decisions. Within six months, the situation at the organization improved, and they gave 50% of their DAF funds as a challenge grant to inspire other donors to give to a new capital campaign. They ended up harnessing the power of their funds at a high point and doing incredible good through it.
Donor Advised Funds Get Heirs Involved in Charitable Giving
Case Study: Ramon
One widower wanted to give a portion of his entire estate to charities that meant a lot to him and celebrated his wife’s memory. In his estate plan, he bequeathed 10 percent of his entire net worth to the couple’s favorite causes, 10 percent to each of their kids, and another 10 percent to a Donor Advised Fund in his kids’ names, together. The idea was that the estate DAF would create a tangible reason for his children and grandchildren to unite annually to honor their parents and impact their communities. It was a way to help them think philanthropically and get excited about generosity for years to come.
Donor Advised Funds Maximize Tax Deductions in Strategic Years
Case Study: Rick and Sarah
One couple owns a business that mirrors the economy, with very good years and very lean ones. They love to give, but there are some years in which that’s harder to do. So they use a DAF as a separate sandbox just for giving, funding it in the good years and offsetting higher income with charitable deductions. Because the fund just sits there until they’re ready, they can still give consistently to their place of worship and the local humane society even when money is tight. And because of recent tax law changes that increased the standard deduction to $24,800, some families no longer itemize each year. I’ve heard of some clients “stacking” their charitable giving, putting several times their typical giving amount into a DAF to make it worth itemizing in a certain year. This is a great way to use an unexpected windfall like an inheritance or year-end bonus. Instead of paying income tax on it because it’ll push you to a higher bracket, you’ll get a charitable deduction.
Donor Advised Funds Streamline Charitable Paperwork
Case study: Betty
One single woman has an inspiring passion for giving, so she has 15% of her gross income deposited right into a DAF. She never even sees those funds! She calls it “tithing,” giving consistently to ministry before all else. Though she grants out most of her DAF funds in the same year they’re deposited, all of her receipting happens through one company instead of through the several organizations she supports. She simply logs into her account at year-end, prints off her receipt, and she’s ready to file her tax return.
How Should a Nonprofit Acknowledge a Gift from a Donor Advised Fund?
A Donor Advised Fund sponsor—like Fidelity Charitable, community foundations, National Christian Foundation, Schwab, Vanguard and others—acts almost like a simplified foundation, and is responsible for receipting the gift as soon as a deposit is made into a DAF. So, a nonprofit that receives a grant from a DAF is not responsible for providing a receipt to the donor for tax deduction purposes. In fact, the nonprofit might not even know who the donor is, if the fund name or grant disbursement doesn’t disclose that information.
But when a DAF grant is received by a nonprofit, that’s a great opportunity to acknowledge and thank the donor for their gift, if possible! It’s a great idea to encourage future DAF giving by the donor, or even suggest they set up a recurring gift that can provide a consistent stream of income for the nonprofit. A growing percentage of charitable gifts are made through Donor Advised Funds…so make it easy for your donors to give through them!
Want to learn how a donor-advised fund could help you meet your philanthropic goals in the short-term and through your estate? Schedule a one-time, 20-minute consultation with a gift planning counselor.
About the Author: Jenny is a graduate of the Metropolitan State College of Denver’s Personal Financial Program, where she received her Certificate in Personal Financial Planning. She’s in her third decade advising nonprofits and educating donors on the best ways to maximize their legacy potential. When she’s not on the road visiting clients or hanging out with her granddaughter, you can find Jenny at the movies (with popcorn, extra butter), curled up with a suspense/crime novel, or enjoying a good glass of wine with those she loves.