It may be a good time to consider using donor-advised funds because of their tax advantages and prevalent uncertainty regarding post-election tax rates.
The Emergency Charity Stimulus Campaign and nearly 300 philanthropists and foundation leaders recently wrote Congress urging them to mandate increased payouts for private foundations and donor-advised funds (DAFs). But “donor-advised funds are already increasing their payout rates without being legally compelled,” said Lawson Bader, president and CEO of DonorsTrust in Alexandria, Va. “The commercial banks, community foundations and mission-driven DAF sponsors are reporting dramatic increases in grant requests and total outlays year-to-date.”
The onset of the pandemic resulted in a 44% year-over-year increase in giving between Feb. 1 and June 30, when donors gave more than $669 million in grants to support both Covid relief efforts and nonprofits, according to Vanguard Charitable. Top causes included Covid-19 relief, religious organizations, education and health.
Grants through Fidelity’s donor-advised fund to free-food programs also jumped nearly seven-fold during the first four months of 2020 from the same period in 2019, added Fidelity Charitable.
“DAFs have exploded in popularity. One of the primary reasons is that they are accessible to a wide range of individuals,” Bader said.
“I’d have to agree that grants from DAFs would be at an all-time high,” said James G. McGrory, a CPA and shareholder at Drucker & Scaccetti in Philadelphia. “Many more families—both high-net-worth and moderate-income households—have discovered the benefits of establishing DAFs.”
Grant making from donor-advised funds to qualified charities has nearly doubled in the past five years, according to the National Philanthropic Trust.
DAFs have grown in popularity ever since the Tax Cuts and Jobs Act increased the standard deduction for 2018 to 2025, added Mary Kay Foss, a CPA in Walnut Creek, Calif. “The tax advantage of a DAF is that taxpayers who are charitable but want to bunch deductions to itemize every other year and take advantage of the higher standard deductions have a safe way to contribute,” she said. “The charities would expect those large contributions every year, which was a turn-off for even the most charitable. So by contributing to a DAF in December, the usual contribution from year one could be paid out that year and the usual contribution for the next year could be paid out in that year, but the taxpayer gets the deduction for both years in the first year.”
For example, Bader said, if a donor normally gives $10,000 annually to a food bank, that individual can put $20,000 into their DAF in the first year, itemize the deduction and put nothing into the fund in the second year. The charity still gets $10,000 each year, making for smoother cash flow.
“An individual can also contribute appreciated long-term securities, obtain a charitable contribution deduction for their fair-market value and there is no capital gain to report on the transfer,” McGrory said, adding that assets contributed to the DAF are also outside of an individual’s estate, “even though the assets within the fund technically do not have to be distributed to public charities for many years.”