Trading Urgency For Impact: Donor-Advised Funds

In these heady days of affluence in metropolitan Seattle (thank you, technology companies!), people inclined to give back are looking for tax-efficient ways to support their favorite charities. Many have used donor-advised funds (DAFs) to have their cake and eat it, too.

A gift of appreciated stock to a DAF, which can be made through one of the many established DAF sponsors such as Fidelity Charitable or the Seattle Foundation, is a leveraged way to extend your giving power over time while potentially avoiding taxes that would be owed if you were to sell the stock and give from the proceeds.

DAFs are, in the simplest of terms, 501(c)(3) nonprofits to which donors make gifts, often of appreciated stock. Although the gift is recognized for IRS tax purposes in the year of donation — with some restrictions — the funds remain in the DAF until the donor chooses which charity or charities will benefit and at what pace (the giving can be spread over several years). While in the DAF, funds remain invested and allow for the potential of giving even more over time.

For example: A long-time Microsoft employee decides to offset a big income year, including vesting restricted stock, by making a substantial charitable gift. Having originally purchased the stock for $50 per share, the employee donates 200 shares at their estimated value of $250 each to a newly established DAF.

While their potentially deductible $50,000 donation includes $40,000 in unrealized gains, by giving the appreciated stock, they avoid taxes on that amount. And they can choose to distribute the funds from the DAF to one or more charities now or in the future. It’s easy to see the appeal.

Potential donors need not be employees with large stock compensation packages to incorporate DAFs into their philanthropic strategies. Certain other assets appreciated — such as real estate, private stock and partnership interest — may also be eligible for contributions.

As a longtime wealthr, I find it gratifying to help my clients discover tax advise-efficient ways to act on their charitable instincts. And it’s equally gratifying to counsel nonprofits, helping them understand the advantages of cultivating these well-intentioned DAF donors.

In my experience, clients who understand the advantages and flexibility of DAF giving affords tend to increase their giving over time. A client I’ll call MK put it best: “The DAF offered me breathing room between needing to make a large donation for tax purposes and making informed and meaningful donations that can create a lasting and impactful change.”

And while nonprofits have historically been wary of DAF donations that can seem slow to arrive, with education, they become excited and aware that DAF donors typically give more than other donors and are often more dedicated and consistent in their support.

Unlike private foundations, which have an IRS required 5% annual minimum distribution, DAFs are public foundations and currently have no statutory minimum distribution requirement. Some DAF institutions in good conscience impose their own minimum requirements, but the good news for nonprofits is that many DAFs distribute in excess of the private foundation 5% minimum. In fact, I am aware of a very large DAF that commonly distributes more than 20% of its funds annually to nonprofits.

The opportunity that the Seattle region’s affluence presents is not lost on nonprofit organizations, and many are actively educating existing supporters on the benefits of DAFs and appreciated stock gifts as a potential win-win for donors.

Part of that education means understanding the potential costs of DAF giving for you. DAFs do charge a modest administration fee for being the intermediary of your gift. And there are some rules that can impact tax benefits. Deductions for annual stock and cash gifts do have percentage limits related to your adjusted gross income, although there are some carryover provisions for amounts in excess of those limits. Also, any stock you plan to donate needs to have been owned for more than one year.

There is a fairly short list of other considerations, all of which are best evaluated with the help of a trusted professional adviser. Together, you can determine if DAFs should be part of a gifting strategy that is good for you, good for the charities and, ultimately, good for Seattle.

Perry Atkins is Managing Director and Family Wealth Adviser at Seattle’s Robert W. Baird & Co.