Hassle-Free Philanthropy

Hassle-Free Philanthropy

One nice feature of the increasingly popular charitable vehicle called the donor-advised fund (DAF) is the ease with which it can be established and managed. An equally important attraction is the ability to accelerate charitable deductions into the year in which any gifts are made to the DAF, even though donors can defer any actual contributions to operating charities. In fact, there is no current requirement to distribute anything from a DAF in a donor’s lifetime, and while some DAFs collapse and close when the donor passes away, many stay open and available to similar ongoing treatment by heirs. Of course, many donors immediately and actively use their DAFs, but some do not. In other words, DAFs are like holding tanks for charitable giving, with valuable upfront benefits and no specific timetables for distributions. Hence, DAFs often get extra attention this time of year, as people look for ways to find tax deductions prior to year-end.

Many wealthy donors still prefer more complete control over their philanthropy and thus Private Foundations also resonate, in addition to direct giving. But Foundations are much more complicated and expensive to establish and administer; and increasingly, people are looking for simplicity and ease of use. This is primarily why the landscape has changed. Whereas 20 years ago Private Foundations predominated, today there are about five times as many DAFs. Impressively, the total asset base of all DAFs is now well above $54 billion—based on 2013 data (Financial News, Dec. 21, 2014)—and more funds get contributed to them all the time. For tax planning purposes, the deduction is limited to 30 percent of adjusted gross income (AGI) for gifts of appreciated securities and up to 50 percent of AGI for gifts of cash. Increasingly, many DAFs can also accommodate complex assets like real estate, private equity, and pre-IPO stock.

And yet, despite their advantages and general ease of use—or perhaps because of these qualities—DAFs appear to be gaining legislative scrutiny that could eventually alter their appeal. Critics argue that if society is going to allow donors to get generous upfront tax benefits, then in return those same donors need to make real commitments to use their DAF accounts to benefit qualified recipient charities. If not, critics say, donors will simply grab the deductions, park the money in DAFs and never use the funds for their intended purpose—flaunting the IRS and forsaking the concept behind the accounts. As a result, some suggest either limiting the life of DAFs (such as requiring full liquidation within a fixed number of years) or mandating a required minimum annual distribution rate similar to the 5% payout that currently applies to Private Foundations. Congress already has considered such proposals over the years, but so far has rejected any changes; however, even diehard DAF supporters acknowledge that some modification of the rules might eventually happen.

Recent headlines further underscore that DAFs are clearly on donors’ philanthropic radar. Even the super-wealthy are utilizing them, as evidenced by recent contributions made to DAFs by Facebook’s Mark Zuckerberg as well as GoPro founder Nick Woodman. This trend is basically good since every DAF account is earmarked for philanthropy—yet these significant gifts attract attention to the topic and stir criticisms. Still, at this point any attention is essentially good attention for DAFs, and these increasingly popular and easy-to-use charitable tools offer real advantages to the philanthropically inclined.

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