Happy (almost) Thanksgiving!
As we slide into the ‘season of giving,’ the level of need in 2020 is extraordinary. According to Feeding America, the largest hunger-relief organization in the US, the pandemic has added as many as 17 million people to the nearly 54 million Americans who face food insecurity every day. And that is far from the only crisis. COVID has put an incredible strain on resources for charitable organizations of all kinds—just when people need help most. Whatever level of resources you have to share, a Donor-Advised Fund, or DAF, can be a great tool to help you be generous and tax-smart.
Even in ‘normal’ years, this is the time when many charities make their largest appeals for donations. It’s a wise move on their part. Many of us feel particularly charitable during the holiday season. But there’s a practical reason, too: tax deductions. As many people complete their final tax planning for the calendar year, December has traditionally been the time to take advantage of the tax benefits of charitable giving. However, the tax calculus changed dramatically with the 2017 Tax Cuts and Jobs Act (TCJA). The increase in the standard deduction and tax deduction limitation to $10,000 resulted in many Americans becoming non-itemizers. As a result, the tax benefit of charitable deductions went away. The Act gave all taxpayers a $300 above-the-line option for charitable deductions. Nice? Sure. But it’s not up to the level that makes a difference tax-wise. If you are in a position to give more, a Donor-Advised Fund can help you regain tax deductions for your charitable gifts. And a beautiful added benefit of a DAF is that it allows you to disentangle your philanthropy from your tax strategy to support a flexible, proactive approach to charitable giving.
How does a DAF help? Consider this scenario: Elizabeth has been giving $1,000 every year to the battered women’s shelter for more than a decade. In the past, that donation delivered a nice deduction. But under the current tax law, she no longer itemizes, which means her deduction has vanished. She would need to give at least $5,000 in a single year to get the deduction. But her charitable intention is to support the shelter at $1,000 per year.
To solve the problem, I recommended that she create a Donor-Advised Fund. Using a DAF, she contributed $10,000 in 2020—enough to support her planned gift for the next decade. That contribution put her well above the standard deduction threshold, so she’ll receive a tax deduction for the full amount in the current tax year. And she has the freedom to fulfill her donative intent of $1,000 a year.
Paul was facing a completely different situation when a Donor-Advised Fund came to the rescue. When he was 40, he received a substantial block of appreciated company stock. Giving wasn’t in his DNA (yet!). At first, he was hesitant. “I’m not really into charity,” he told me. “But maybe it’s time to change my ways.” He agreed to set up a DAF and donate the appreciated securities he had inherited. That enabled him to avoid capital gains tax while also reducing a concentrated investment position. The DAF was re-invested in other securities and continued to grow.
Paul’s new wealth—and the fact that he had a pool of funds to give to charity whenever it felt right to him—motivated him to become a generous philanthropist. Because his DAF didn’t force him to make any immediate decisions about who, when, and where to give, he was able to take the time to think deeply about his gifting strategy, not about taxes. “Now, I’m always thinking about where to give next… but for all the right reasons.” Over the past ten years, Paul has replenished his DAF and has become a distinguished donor here in Orange County. It’s been a remarkable evolution to watch!
If you think a Donor-Advised Fund may be right for you, there are many options when choosing where to establish your own fund. When I create DAFs for my clients, I often suggest the American Endowment Foundation, but there are many fund providers to consider. Some of the top national funds include those offered by for-profit institutions such as Schwab Charitable, the Fidelity Charitable Gift Fund, and the Vanguard Charitable Endowment Program; as well as funds from independent sponsors such as the National Philanthropic Trust and the American Endowment Foundation. Community foundations are nonprofit entities that focus on local interests and offer personal assistance to simplify creating, funding, and giving using a DAF. Two that I recommend in our local area are the Jewish Community Foundation of Orange County and the Orange County Community Foundation. (Note that while nonprofits like these charge fees, the net income they earn is donated back into the community via grants, whereas fees paid to for-profit organizations add to their corporate profit.) Many public charities also have DAFs to support their missions, such as hospitals, universities, and many more. Note, too, that DAFs aren’t only for the wealthy. While some institutions require a rather substantial initial contribution, others have no minimum contribution. And no matter who you choose to work with, the fund providers make it easy to give. You can either write a check yourself, request a check from the institution, or even make an online transfer request.
Whether charitable giving is already in your DNA or not, a Donor-Advised Fund may be just the thing to help you take this ‘season of giving’ to a new level. A charitable giving strategy empowers you to choose who you want to help, how much you want to give, and when you want to give. A Donor-Advised Fund does all of that—and more (largely because the tax-tail doesn’t wag the charitable dog!). Today, many people are in need, and many others want to be tax-savvy. To learn more about Donor-Advised Funds, please reach out. I’m happy to walk you through the details and explore how we can make a DAF part of your overall wealth strategy.
Have a wonderful holiday and continue to stay safe!