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Advisors usually understand how donor-advised funds (DAFs) work, their tax benefits and how they can manage the investments in their clients’ DAF accounts. However, advisors need to help explain their benefits in comparison to donating directly to a charity.
Dov Gertzulin's DG Capital is having a strong year. According to a copy of the hedge fund's letter to investors of its DG Value Partners Class C strategy, the fund is up 36.4% of the year to the end of June, after a performance of 12.8% in the second quarter. The Class C strategy is Read More
There are still many reasons why clients should donate directly to their favorite charities. But, along with their financial, tax, and legal advisors, they should evaluate different charitable vehicle options. Together they can determine which one of these options is more prudent to utilize in order to make their donations, receive the maximum tax deduction and have the greatest impact upon the organizations that they care deeply about.
While the number of private foundations has barely increased over the past decade to just over 80,000, the number of DAFs has more than doubled to 270,000 as of the end of 2015. This number is most likely over 300,000 since so many were opened during 2016 and especially in the months after the 2016 election.
Even though many of the following advantages pertain to all charitable vehicles, this list below applies primarily to DAFs. Those advantages include:
- Clients can “deposit” money for future giving. It is easier to donate to a vehicle while earning a significant income rather than dipping into retirement savings to make donations. Consequently, many clients set up vehicles while working and then make donations from it during retirement when their income is significantly less.
- They can donate assets to receive significant tax benefits at the time of the donation. This is especially applicable during the year of a liquidity event or when they earn a large income.
- They can use the assets in their vehicle to maintain a consistent level of donations to their favorite charities, even if their income or investments drop during a year. When a donor’s donations rise and fall, it can be challenging for their grantees to budget accordingly and it can be awkward for a donor to explain the reason for a drop.
- Clients can still continue to make grants from their DAF account without fearing that they are dipping into their savings or investments.
- Many charities may not be able to accept complex assets such as real estate, privately-held stock, LP or LLC interests, insurance or even simpler assets such as appreciated stock. Instead, clients can donate these to a DAF and then the DAF can send checks to the charities. In many cases, donating these to a DAF instead of a private foundation results in greater tax benefits.
- Donors may want to make large donations to charitable organizations over time to make sure that they utilize the donation wisely, but want to donate the entire asset to a DAF so they receive the entire tax deduction at one time. So they are not overwhelmed by a large gift, some charities prefer to receive the donation over time. The donors can thus also monitor the work and outcomes of the charities rather than make one gift at one time to a charity and lose control.
- Clients may not want to donate an entire asset to one charity and may want to split it up among numerous charitable beneficiaries. It is easier to donate this to a DAF and then make separate grants from it.
By Ken Nopar, read the full article here.