More On Tax Planningfrom The Advisor's Professional Library
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
These funds now run the gamut, from initial donations as low as $5,000 to accounts with tens, or even hundreds, of millions of dollars. Private foundations may be the right choice for some clients, but for many others, the ease of setting up a DAF, higher deduction limits, and the fact that foundations must file a tax return, disclose all grants in public documents, and pay an excise tax of up to 2% of income, can make a DAF a very desirable option.
Clients and advisors may find funding a DAF account easier than they realized, because the types of assets that can be used are surprisingly broad. That means that publicly traded securities and cash aren't the only ways to fund a DAF anymore--so if it is in the client's best interest to donate that Renoir painting, or the emerald necklace she inherited from her grandmother, or her ownership share in the Knicks, chances are good there's a major DAF sponsor that can accommodate that gift, bring in the experts to evaluate it, and liquidate it. That sort of turnkey service can give clients the advantages of scale and expertise in dealing with unusual assets, a bigger tax deduction by donating the appreciated asset rather than liquidating it first and donating the proceeds, and assets under management by the advisor can stay intact, or grow if the advisor and client elect to have the advisor manage the converted assets in the DAF, something that's possible at several big sponsors.
Advice is one of the important drivers for DAFs. David Giunta, president of Boston-based Fidelity Charitable Gift Fund, by far the largest DAF with a total of $10.1 billion donated since the fund began in 1991, says he sees many donors who have spoken to "either an advisor or a planner somewhere in the process, and we're seeing that percentage grow." He adds that clients are inclined to speak to advisors about making charitable gifts as part of their overall plan, and advisors are getting more "comfortable engaging clients in those type of philanthropic conversations." Though minimum amounts vary, at many of the largest DAF providers advisors can manage the assets in the DAFs of their larger clients, if they so choose. That way, the assets are donated, the tax deduction is triggered, and assets in the DAF can be granted to qualified charities by the donor in planned, strategic ways, while the remaining assets stay under the advisor's management.
"Unlike a private foundation where you have to hire an attorney and set up an independent, nonprofit corporation," says Kim Wright-Violich, president of Schwab Charitable, in San Francisco, "the client and the advisor select the assets they want to fund the account, they transfer those, probably appreciated securities--that's the most likely asset," to the charitable account, "fill out two or three pages of an open-account form, and you are done." When those assets "hit the books" of the DAF, "that triggers a charitable deduction," says Wright-Violich.
Grants out of the newly formed DAF account can be made immediately after the assets clear. Remaining assets are invested in a broad array of mutual fund portfolios, or investment pools, and growth is "tax free" in DAFs, according to Ann Boyce, president of the T. Rowe Price Program for Charitable Giving, in Baltimore. With that tax-free growth, grants made over a period of years could exceed the donations into the DAF.
Fidelity Charitable Gift Program
Of the total $10.1 billion donated into Fidelity's Gift Fund, more than $7.4 billion has been granted out to 501(c)(3) charities since inception, including $950 million in grants made last year. On average, the fund grants about 27% of total assets annually, and the average grant is $4,200. Over the past three years, the Gift Fund has made an average of 190,000 grants each year, and they "expect to process more than 250,000 grants in 2007," says Fidelity spokeswoman Jennifer Engle.
In addition to publicly traded, appreciated securities, and cash, the Gift Fund can also take non-public assets such as C-Corporations, S-Corporations, or limited partnerships. "This year, about 77% of our overall contributions are coming in the form of non-cash assets," says Giunta. Remember: all donations used to establish DAFs are irrevocable.
The minimum required to establish a DAF at Gift Fund is $5,000. Donors can select from 13 investment pools, three asset allocation pools, and three index pools. "Some of them have just Fidelity funds in them and some of them have Fidelity and non-Fidelity funds mixed in together," says Giunta. "For higher balance accounts we have a Charitable Investment Advisor Program," he explains. "Donors who give $1 million or more can recommend a registered investment advisor to manage the balance in the account," he says. "Charitable Gift Fund will conduct a due diligence process, and if everything goes well, we'll hire that RIA to manage that balance."
Vanguard Charitable Endowment Program
Vanguard's Charitable Endowment Program celebrates its first decade on December 8, Benjamin Pierce, the executive director of the Valley Forge, Pennsylvania-based program, proudly declares. Over those ten years, donors have funded the program with $2.8 billion in assets, and granted out $1.4 billion, including $370 million in the fiscal year ended June 30. The program has $1.7 billion in assets remaining. Vanguard Charitable's focus is on "personalized service...low fees...and transparency," Pierce says.
Pierce tries to keep the special value of a DAF in front of advisors, with ideas to help them "look smart with their clients." IRAs are a good example, from an estate planning point of view. When a person dies, "60% to 70% of that IRA is going to end up in Uncle Sam's coffers unless the client does something about that," he says. "If they give it to donor advised fund, then those funds come out of the estate, it all goes to the donor advised fund, the client's family members become the advisors to that account [directing gifts and investments], and they can be really good philanthropists. It's a very tax effective solution and it continues a family legacy."
Schwab Charitable Fund
While appreciated securities "represent more than 70% of all contributions," says Wright-Violich, Schwab will take other kinds of assets, too. "You can use almost any asset. If the market value is hard to determine, it's more complex to give, and if it's something you can move physically--a piece of artwork, a horse, a yacht--it gets even more complicated." When someone donates "an asset that is difficult to value," the fund uses "experts that specialize in that kind of asset liquidation and valuation. They're pretty inexpensive but they do charge a fee for that." The most unusual donation Schwab Charitable has received to fund a DAF is "a piece of the Vikings [NFL pro] football team," says Wright-Violich, with a chuckle. Schwab Charitable has accepted artwork, a seat on the New York Mercantile Exchange, and other unusual assets.
Wright-Violich says advisors should "want to make sure clients capture at least two benefits of the tax code: either avoidance of the capital gains tax plus a charitable deduction, or a charitable deduction and the reduction in estate taxes. If they give cash then they're only accomplishing one thing: they're securing the charitable deduction."
Begun in 1999, Schwab Charitable has taken in $2.8 billion in donations so far, and granted $875 million since inception, $350 million of that in this fiscal year. The minimum required to establish a DAF account at Schwab Charitable is $10,000, and the typical grant from a DAF account there is $5,000 to $6,000. Advisors and donors can choose from eight investment pools to invest the DAF account's assets, or if the account is $250,000 or more, a registered investment advisor can manage the assets, using Schwab's Charitable Asset Management feature.
T. Rowe Price
Donor advised funds "are definitely reaching a critical mass," T. Rowe Price's Ann Boyce notes, and "the tax message resonates first--people are aware of the tax deduction."
Charitable donors "often have a core group that they donate to every year. A donor can do scheduled grants," each year to a specific organization, Boyce explains, "and so each year we would automatically do the due diligence and automatically [make the grant], or they can go online and click on a prior grant, and just change the amount of money and submit it online--it takes two seconds." So, as Boyce puts it, "it starts with tax, then it goes with, 'How do I get my grants out?' and that this is so simple, and then, 'Gosh, my account is really growing.' That's the progression."
T. Rowe Price Program for Charitable Giving, established at the end of 2000, has taken in $77 million in donations to DAF accounts, and granted out more than $28 million, including $9.2 million last year. There is $62 million remaining in the fund. A donation of $10,000 will establish an account, and grants to charities average $2,600. Advisors and clients can select from five investment pools of T. Rowe Price funds to manage the remaining assets, and with a $3 million account, an outside RIA can manage assets.
Franklin Templeton Charitable Giving Fund
One reason to choose a DAF instead of establishing a private foundation, according to H.G. (Toby) Mumford, Jr., senior managing director of alternative investments at Franklin Templeton Investments in San Mateo, California, is the ability to "give money anonymously, which you cannot do with a private foundation. All the money you give away [in a private foundation] and all of your activities are a matter of public record." Mumford continues, "We have actually seen private foundations also establish a donor advised fund, and give some of their money away through their DAF, because again, they want to give it anonymously."
The Charitable Giving Fund at Franklin Templeton has received about $100 million in donations to establish DAFs since it began in 2002. So far, they have granted $29.7 million out to 501(c)(3) charities, including $5.7 million last year. Grants to charities are $7,400 on average. There is $70.4 million remaining in the fund. All of Franklin Templeton's DAF assets are held by a third party, Renaissance Charitable Foundation, Inc., which performs the administration. The minimum required to establish a DAF through Templeton is $5,000. The types of assets that can be used to fund a DAF at Franklin Templeton are broad, including closely held or non-public stock, real estate, or collectibles. The most unusual donation? "A Ferris wheel," Mumford reveals.
Calvert Giving Fund
When it comes to making grants out of a DAF, Shari Berenback, executive director of the Calvert Giving Fund, explains, "we're probably even more flexible [than other commercial DAFs because] we do international grant-making, as well as make grants to groups that are not 501(c)(3)s but clearly have a charitable purpose. We're able to do that extra legwork to make that possible."
Donors can grant to typical 501(c)(3) charities in the U.S., and also to international causes, and communities, unlike most DAFs. Calvert uses socially responsible investments (SRI), so remaining assets are invested in a combination of Calvert Group's SRI funds, and Calvert Community Investment Notes (CCI). There is the option for an RIA to manage a DAF's assets.
Memorable assets that Calvert has accepted include a half-share of a ski condo, and a vacation home in the San Juan Islands.
Calvert Giving Fund does something unusual: they pay brokers "a modest trail," Timothy Freundlich director of strategic initiatives at the fund reveals, and a "one-time honorarium," setting up a DAF for the advisor funded with "half of the first year's administrative fees." The trail and honorarium come from the "overall operating budget--it doesn't hit the investments," which are all done at the NAV. "This is not how people are making a ton of money in their practice. This is about extending your relationship and meeting the needs of your clients where they are today, and where they're going."
E-mail Senior Editor Kathleen M. McBride at firstname.lastname@example.org.