After the opportunity to spend time with loved ones at Thanksgiving and consider all we have to be thankful for, it is natural to turn, at this time of year, to how we can give back to society, make life better and support the charitable causes we believe in.
Currently, though this may not always be the case, as we give to our favorite charitable entities, we also reap the benefits of tax breaks. Because of the uncertainty of the tax situation for 2011, with the estate tax—and possibly other tax rates—poised to rise if Congress does not act, it is well worth looking at one of the simplest ways to establish a philanthropic vehicle, the donor-advised fund, or DAF.
To begin, let's bust some DAF myths.
- DAFs are for small donors: That’s so only if you think $250 million in funding for your giving vehicle is small potatoes! I know of no limit to the amount of money with which a client can fund a DAF.
- DAFs are for big donors: Many DAFs have initial funding requirements as low as $5,000.
- Donors lose control of the money because the DAF decides which not-for-profits it grants donors’ funds to: Not so! The donor decides where their DAF’s charitable grants go; most fund-company sponsored DAFs allow gifts to any qualified 501(c)(3) organization in the U.S. and many permit grants to international non-profits (with some restrictions). However the donor must grant to actual non-profit entities; your kids’ private school tuition won’t qualify.
- Advisors lose the assets under management: Some DAF sponsors, like Fidelity Charitable Gift Fund, allow approved registered investment advisors (RIAs) to manage the assets in the DAF and just added certain alternatives to permitted investments.
- DAFs are a do-it-yourself proposition: Many of the largest organizations that sponsor DAFs will provide help to donors with their giving strategy, or to vet nonprofit organizations. Some, like Schwab Charitable, even allow donors to underwrite microlending via banks—and once the loan is paid back, donors can underwrite more microloans. That lets donors re-use the money, if they so desire, and then it can eventually be granted to non-profits.
- Donors must fund a DAF with cash or securities: Funding with assets other than cash can be advantageous. Many of the large, fund-company sponsored DAFs, such as The Calvert Giving Fund, Fidelity Charitable Gift Fund, Schwab Charitable, The T. Rowe Price Fund for Charitable Giving and Vanguard Charitable Endowment Program, allow for the donation of various assets such as art, real estate or jewelry; one even took in a Ferris wheel to fund a DAF.
- Once a DAF is funded, the grants need to be made immediately: Not so. Unlike a foundation—which has an IRS-mandated granting requirement of 5% per year, money in a DAF can be granted out to nonprofits all at once or over a period of years. The granting strategy is something wealth managers can work on with their clients.
- The tax break can't be taken until the grants are made out of a DAF: The tax break for donating to a charity is immediate: in the year the DAF is funded. So if a DAF is established before year-end, the tax break is in 2010; January first, it’ll be for 2011.
- You can't be an anonymous philanthropist in a DAF. In a foundation, grants to the actual charities the foundation supports support are public—a list must be filed each year. In a DAF, the donor can support a cause anonymously if they wish to.
Doing Something for Others Makes Us Happiest