Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, September 03, 2020

Reading Along With Ryder Part 4: Donor Advised Funds

Cleaning all of these magazines off of my desk is hard for me, because I don't want to miss out on the knowledge they contain. To alleviate this, I will summarize one article from each magazine as I clear it away. Click here for the last article I read.

Today's article came from Investment News, which bills itself as The Trusted Resource for Financial Advisers. The article was on Donor Advised Funds, a topic I have a lot of love for.

First, the basics: a Donor Advised Fund, or DAF, is a charity. It is a charity that allows individuals to have an account. In that account, they can deposit money, generally cash and appreciated stocks (though more complex assets can go into them). Putting money in your account counts as giving it to charity. You get a tax deduction that year. The money sits in the account (the DAF may let you invest it, or keep it in cash) until you decide to grant it out to specific charities. There are some technical details I'm not covering, but that is the gist of it. This process of being a sort of intermediary charity presents a lot of interesting planning opportunities.

I am a huge fan of folks incorporating their giving into their financial plans, and this tool is ideal for it. Donors can give a large amount when they can afford it, but space actual charitable grants out over time, focusing on making the impact that truly aligns with what they want to see in the world. It is even possible to set up legacy gifts in a way that was previously only available through trusts or private foundations.

One advantage for the donor is that these accounts often make it easy to donate a large amount of appreciated stock. Say you have a stock for a very long time that has grown a lot (like, say, buying TSLA a few months ago). If you sold that stock, you would have a large taxable capital gain. If you donate it to charity, you get a tax deduction equal to the value of the stock on the day you donate it! Avoiding a tax bill and reducing another? Thats a great deal. While many charities can receive stocks, not all can. This also makes it easier for you to donate a single stock to multiple charities. If you wanted to give thirty different charities $10,000, you could give a single share of Berkshire Hathaway to your DAF and send it along as cash.

Importantly, with the change in standard deduction, DAFs have become more attractive. The article notes that with the Standard deduction at $12,400 or $24,800 for couples, fewer people can meet the threshold for deductibility in a single year. A tactic we have helped people with is bunching up their charitable donations into one year - contributing enough to cover several years worth of giving. They give enough to get a substantial charitable deduction in one year, and take the standard deduction in the other years. Their beneficiary charities still receive money every year as the donor intended.

Ultimately, receiving the gift is fairly simple for the receiving charity: it just comes as a check! Sometimes the checks are anonymous, or unclear who the giver was, which charities don't like. On the other hand, it is easy to set up recurring donations which the charities love.

The most interesting information in the article to me was about the growth of the DAF "industry:"

  • 12.7% of all individual charitable giving was through DAFs in 2018.
  • In 2018, $37 Billion was given to DAFs and $23 Billion was passed on to charities.
  • There are an estimated 728,563 donor advised fund accounts.
While there can be some concerns about money getting tied up in these entities, and not ultimately flowing to the charities that need the funds most, I believe that this is simply a tool that allows people to be more flexible with their giving. Ultimately, if this makes giving easier, and more impactful for the donor, it will benefit all charities!