As if a worldwide pandemic and subsequent recession isn’t difficult enough, the additional peak of a major cultural crisis now has us all searching for ways to best make a difference in this nation. Affluent investors who want to accelerate their generous giving in response to current events have new incentives to do so, thanks to the CARES Act regulations passed earlier this year. For those who want to help, but aren’t exactly sure how, a Donor Advised Fund (DAF) offers a flexible alternative to consider.
UNDERSTANDING DONOR ADVISED FUNDS
A DAF is a private fund established and managed by a DAF sponsor (described below) which gives the donor control over future distributions of charitable gifts. Contributions to DAFs offer tax advantages of up to 60% adjusted gross income (AGI) for cash contributions and up to 30% of AGI for donated appreciated securities. DAFs can hold funds indefinitely, whereas private funds or family foundations require funds to be distributed within a specific timeframe.
Families often pool contributions into DAFs to pursue family philanthropic objectives. Gifts of appreciated securities to a DAF receive fair-market value tax deductions without incurring capital gains taxes. For these reasons and more, the popularity of DAFs has increased over the years, with charitable assets in DAFs expanding to over $121 billion in 2019. In a simple description, a DAF can be considered a charitable investment account, where you get your tax deduction at the time of your contribution, along with flexibility to invest these contributions until you decide when to make a distribution to a charity.
FINDING A CHARITY CONNECTION
Budros, Ruhlin & Roe’s wealth management strategies take philanthropic planning into consideration. We don’t tell our clients where to invest, but rather how to invest for greatest tax advantages. So where can someone get access to a DAF?
Individuals looking to make a charitable impact in this way would seek what is called a DAF sponsor. There are three, primary types of DAF sponsors: Community Foundations, National Donor Advised Fund Organizations and Public Foundations.
- Community Foundations range from faith-based organizations to over 700 community foundations in existence today. One example is the Columbus Foundation, a long-standing philanthropic advising resource in Ohio that is well-connected to efficient and effective non-profits in our area. These foundations offer a connection to local charities that are appealing to investors, especially during times of unrest like we are experiencing.
National Donor Advised Fund Organizations
- National Donor Advised Fund Organizations are typically charitable divisions of for-profit financial organizations, like Schwab, Fidelity and Vanguard. The American Endowment Foundation or the National Philanthropic Trust are examples of others making up over 30 National Donor Advised Fund Organizations in existence today.
- Public foundations and charities typically advance their own charitable missions, focusing on a specific issue, region or population. They are required to have less than 50% of its funding from a private entity.
CATCHING CARES ACT INCENTIVES
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created two tax benefits for non-profit donors. The first allows an “above-the-line” deduction for charitable cash gifts up to $300, if the taxpayer is not itemizing deductions. Non-profits have long advocated for this benefit, but it does little to provide incentives to increase giving.
The more notable benefit for investors is the increased deduction cap for charitable gifts made with cash. Current legislation caps the deduction at 60% of AGI. However, thanks to the CARES Act, investors can now deduct up to 100% of their AGI with charitable cash gifts made in 2020.
Non-profits are facing some of their most challenging days. Many fundraising events have been postponed or canceled altogether this year. These critical organizations are living in continued uncertainty of income sources and challenges around group gatherings. Now is the perfect time for investors to accelerate generous giving while maximizing the tax incentives of the CARES Act or the flexibility of Donor Advised Funds. Talk to your wealth manager today about the causes your family supports and the strategies you can utilize to impact people in need. Your community needs you.
Daniel Due, CFP®, CAP®
Senior Wealth Manager