Tax reform has given wealthy clients the ability to use donor-advised funds for bigger tax savings.
The number of donor-advised funds has tripled over the last decade. Now, with the increased standard deduction that was part of Trump's tax reform, they are becoming even more popular among high-net-worth clients, according to advisors.
Grant-making from donor-advised funds to qualified charities in 2017 increased by about 20 percent from a year earlier, according to the National Philanthropic Trust. Contributions during that period also rose 16.5 percent. There are now more than 450,000 DAF accounts, compared with 150,000 a decade ago, according to the trust.
DAFs are an effective tool under President Trump’s recent tax reform—and may become even more popular after this filing season’s refund sticker shock for many taxpayers, according to advisors.
“As the standard deduction was increased for a married couple to $24,000, bundling several years’ worth of charitable contributions in one year to itemize in that year, and then taking the standard deduction in the following years, could be prudent,” said Mike Mussio, president of FBB Capital Partners in Bethesda, Md. “Most folks who are charitably inclined with appreciated, low-basis stock should at least be considering using DAFs. They’re likely to experience multiple additional benefits, including an effective zero percent capital gains tax and low costs and fees.”
“In the itemized deduction year, the taxpayer puts at least two years’ donations into the DAF and in the [following] standard deduction years the charities receive their donations from the DAF instead of the individual,” said Mary Kay Foss, a CPA in Walnut Creek, Calif.
Many clients understand the benefit of donating appreciated stock and negating capital gains, Mussio said, but “they frequently believe that as with their normal giving method—typically writing checks—all the proceeds of the appreciated stock must be allocated to specific charities in that same year. DAFs allow more flexibility.”
For example, a $25,000 gift to a DAF this year allows for granting $5,000 annually to charities over the next five years. “Over that time the money in the DAF is invested, so perhaps the $25,000 grows to $30,000,” Mussio added. “The impact of the gift is greater.”
DAFs still come with challenges. “Donors often are concerned about control and must accept that the charity sponsor may decline some grants,” said David Okorn, executive director of the Long Island Community Foundation in Melville, N.Y. The foundation, he added, has a due-diligence process that most clients see as a plus.
“From time to time, Congress has suggested requiring DAFs to pay everything out in five years or less,” Foss said. “That’s not a problem if you’re just using the fund to bunch itemized deductions, but it’s been a concern of those sheltering a large liquidity event or other blip in income. A time limit requires some management of the DAF, [but] currently there is no time pressure on distributing the funds.