It’s the season when people keep giving, and financial planning organizations are asking advisors to talk to their clients about contributing to donor-advised funds.
“One of the main reasons for the popularity of DAFs is just the simplicity of being able to create a donor-advised foundation to have that look and feel of having your own private family foundation without the headache and expense,” said Kyle Christopherson, senior vice president of client success. at REN. “As far as charitable giving tools go, this is definitely one of the most popular today and the fastest growing we’re seeing.”
The National Philanthropic Trust’s 2023 report showed a 9% increase in grants made by DAFs in 2022, to $52.16 billion, a new high for grant money. Contributions also grew 9%. While grants and contributions showed growth, charitable assets in DAFs declined, partly as a result of stock market losses.
There are growing benefits to consider in relation to putting money into a DAF. The vehicles offer immediate tax deductions, simplified charitable giving, and the potential for asset growth. They also help create a philanthropic family legacy.
“It’s also a great way to get your kids involved in philanthropic giving and let them see the benefits of getting involved with their community through charitable giving,” added Christopherson.
Those who give to charity through a donor-advised fund can receive a number of deductions and tax benefits. For charitable contributions, whether it’s to a gift-advised fund or charity directly, there’s a maximum limit individuals face, which is based on adjusted gross income, says Richard Pon, a consultant and CPA.
“If you make money, the total you can make in a year is 60%. If you do non-cash, like securities, it’s 30%,” said Pon.
Carlos Lowenberg, founder and CEO of The Lowenberg Group, said he’s even seen people donate prized vehicles to charities or auctions.
Lowenberg added that DAFs are a lost opportunity for many wealthy investors who want to do something good and something for themselves at the same time.
“Business owners (especially) who are willing to sell their business and look at charitable planning and philanthropy can make a huge difference in what their net after-tax proceeds are when they sell their business,” he said.
Lowenberg said clients can contribute public or privately owned stocks to their DAF. With privately held, there is the qualified small business stock, which has the added advantage of providing the deduction for the value of the gift while avoiding paying capital gains on the stock, as opposed to selling it and making a gift.
“It’s a more effective gift,” he said.
Cinira Baldi, head of development and communications at Project Hope, said there is some controversy surrounding DAFs. While DAFs have grown exponentially over the past several years, there are no rules regarding the release of funding from DAFs.
“Someone’s DAF could sit for years without any money being released, and that becomes a problem for charities that rely on charitable donations to do their critical work,” Baldi said. “You have billions of dollars just with financial institutions that could actually be directed to people who need the funding.”
Christopherson adds an important reminder: Once a gift-advised gift is made, there is no chance to see those funds again.
“When you make that gift, make sure you’re able to handle that kind of gift,” says Christopherson. “You don’t want to give so much that you don’t have enough for your immediate needs or anything along those lines.”
Baldi added that it’s the perfect time of year for customers to look at their top three charities and make a DAF donation.
“Look at freeing up money and making a donation. Don’t forget to do the donation part,” she said.