Donor-advised funds have grown in popularity ever since the Tax Cuts and Jobs Act increased the standard deduction people use on their taxes.
That means now may be a good time to consider using these funds given their tax advantages and the prevalent uncertainty about what the post-election tax rates are going to look like.
Nearly 300 philanthropists and foundation leaders recently wrote to Congress (under the auspices of the Emergency Charity Stimulus campaign) urging lawmakers to mandate increased payouts from private foundations and donor-advised funds to charities. 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 [donor-advised fund] 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 February 1 and June 30, when donors gave more than $669 million in grants to support both Covid relief efforts and nonprofits, according to donor-advised fund Vanguard Charitable. Top causes included Covid-19 relief, religious organizations, education and health.
Fidelity Charitable said grants through its donor-advised vehicle to free-food programs also jumped nearly sevenfold during the first four months of 2020 from the same period in 2019.
Donor-advised funds “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 [donor-advised funds] 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 [them].”
Grant-making from donor-advised funds to qualified charities has nearly doubled in the past five years, according to the National Philanthropic Trust.
The Tax Cuts and Jobs Act increased the standard deduction for 2018 to 2025, which has made this vehicle more attractive, added Mary Kay Foss, a CPA in Walnut Creek, Calif. The tax advantage of these funds, she says, “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 turnoff for even the most charitable. So by contributing to a [donor-advised fund] 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 donor-advised fund 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 donor-advised fund 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.”
“Many charitably inclined wealthy families believe they must establish a private foundation to be able to make a philanthropic impact,” he said, adding that donor-advised funds “are an excellent and less-costly alternative.”
These funds cannot, however, be used to make qualified charitable distributions from retirement funds, and they can’t be used for the Coronavirus Aid, Relief, and Economic Security (CARES) Act contributions for taxpayers who don’t itemize.