According to the 2017 Donor-Advised Fund Report created by the National Philanthropic Trust, individual giving accounted for $281.86 billion, or 72%, of all charitable giving in the US during 2016. The NPT also reports that contributions to Donor-Advised Funds totaled $23.27 billion in 2016 which was a 7.6% increase over the previous year’s level of giving. The increase in the use of Donor-Advised Funds as a vehicle for individual giving is a trend that is expected to continue given the recent changes to the tax law created by The 2017 Tax Cuts and Jobs Act passed by Congress in December of 2017.
So, what is a Donor-Advised Fund? The IRS provides the following description: “…a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501 ( c ) ( 3 ) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”
Let’s unpack that definition. A 501 ( c ) ( 3 ) is a tax exempt, charitable organization. Many large broker dealers have created independent public charities that offer Donor-Advised Fund accounts and associated services. PBMares Wealth Management works with Schwab Charitable.
An individual may make contributions to a Donor-Advised Fund. These contributions can be made in several ways. You can donate cash, of course, but you are also able to donate assets such as stock holdings, real estate, shares in a privately held company, interests in private equity, and fine art collectibles. If you were to sell an appreciated asset as an individual you would incur taxes on the appreciated value of said asset in most circumstances. By making a contribution of an appreciated asset to a Donor-Advised Fund you potentially are able to eliminate the tax liability for the sale of the asset while receiving a current year tax deduction for your contribution. According to the National Philanthropic Trust, “Donors receive an immediate tax deduction when they make a charitable contribution to a donor-advised fund. Deductions include up to 60% of adjusted gross income (AGI) for gifts of cash and up to 30% of AGI for gifts of appreciated securities, mutual funds, real estate and other assets. There is a five-year carry-forward deduction on gifts that exceed AGI limits.” The Donor-Advised Fund is able to liquidate the contributed asset with no tax implications and then invest and ultimately distribute the proceeds to the charity or charities of your choice. This can be a very powerful tool to use in a philanthropically oriented wealth management strategy.
While your contribution is made all at once and is deductible for a specific tax year, the Donor-Advised Fund is able to spread the disbursement of your gift over several years, even after your lifetime. This allows you to structure your giving in whatever way is most beneficial to the charity or charities you want to support.
It is important to note that contributions to a Donor-Advised Fund are irrevocable. This means that legal control of your gift has passed from you to the fund and you can never get your contribution back. You do still retain the ability to choose how your contribution is invested. For larger accounts you can appoint an independent investment advisor, like PBMares Wealth Management, to manage the account for you.
Many Donor-Advised Funds will also handle much of the administrative work of your gift. Services can include verification of charities, generating grant letters, disbursing funds, recording and keeping track of all contributions and grants, and creating annual reports for tax purposes.
For those who are motivated to make charitable donations, there are many options to consider when selecting a method for making a gift. If you would like to develop a plan to make a charitable gift, we welcome you to consult with PBMares Wealth Management. One of our Advisors can assist you in making a selection that is in your best interest.