March 13, 2018

6 Reasons to Choose a Donor-Advised Fund as Your Vehicle for Charitable Giving

David Koehler


Pictured above: Pete and Jill Lundberg established a donor-advised fund, called The Peter and Jill Lundberg Fund, to supports a variety of local causes in perpetuity.

As 2017 came to a close, calls, emails and gifts to Madison Community Foundation (MCF) steadily increased. The confluence of a strong stock market, year-end giving and looming changes to tax laws drove donors to give generously, adding to an already strong year for philanthropy. When the dust settled, Madison Community Foundation saw a 65% increase in the number of new charitable funds opened over the previous year.

Across America, charitable giving has reached new records in each of the past three years. In 2016, donors gave an estimated $390 billion to support charitable efforts at home and around the world. Numbers for 2017 are expected to be even higher.

As giving has increased, so has the popularity of donor-advised funds (DAFs), where donors make irrevocable gifts to sponsoring charities such as MCF to establish named funds and then recommend grants from those funds to support their chosen charities.

According to Giving USA, DAFs are the country’s fastest-growing vehicle for philanthropy, annually accounting for an increasing share of overall giving. There are approximately 300,000 DAFs in the United States today–roughly three times the number of private foundations.

The reasons DAFs are so popular are numerous and growing. Here are six benefits of establishing one for your own charitable giving.  

  1. DAFs are easy to establish and use. It takes just a few minutes to create a DAF, and donors can recommend grants from their fund at any time. At MCF, certain funds can be started for as little as $1,000. Others, which are designed to give in perpetuity, can be established with $15,000 or more. Like private foundations, DAF holders may assign successive advisors so that others may carry on their legacy of giving.
  2. Donors may give a wide variety of assets. These include cash, appreciated stock and real estate. 
  3. DAFs provide donors with significant tax advantages. Contributions to DAFs are deductible, and gifts of appreciated property like public stock, closely-held stock and real estate are deductible at full fair market value. This is a significant advantage over giving closely-held stock or real estate to a private foundation, where the deduction is limited to the cost basis of the asset.
  4. There are no costs to establish a DAF, no separate tax filings, and administrative fees, which at MCF flow back into the community, are low.  
  5. DAFs allow donors to make gifts today and then recommend grants over their own timelines. DAFs also offer donors flexibility when unique tax events arise. For example, an individual who sells a company can easily establish a DAF to help maximize immediate tax benefits and then recommend grants in the years ahead.
  6. Anonymity. Donors who choose to give through DAFs may remain anonymous if desired. This is difficult to achieve with private foundations due to the public nature of their tax filings.

While the forthcoming changes in the tax law contributed to the increase in giving at the close of 2017, many experts believe we may see a dip in giving in the years ahead.

Under the new tax laws, the standard deduction will increase to $12,000 for individuals and $24,000 for couples. As a result of these changes, it’s estimated that less than 10 percent of all tax filers will itemize deductions. The other 90-plus percent will take the standard deduction and no longer receive a tax benefit for their charitable giving.

Fortunately for charities, donors give for many reasons beyond taxes. And when taxes are a concern, donors are responding creatively.

To continue to realize tax benefits from giving, some donors are “bundling” several years’ worth of charitable giving into a single year, and then distributing gifts over time. For example, a couple who gave $10,000 per year and itemized deductions before the tax changes may now choose to give $30,000 to a DAF every three years. In this scenario, the couple would take the standard deduction during years when they are “saving up” to give and then itemize during the year when they’ve “bundled” their giving into one larger amount. Once their gifts are in DAFs, donors may recommend distributions over the months and years ahead to benefit their favorite charities.

As always, everyone’s tax situation is unique and we encourage you to consult your own tax advisor before employing any tax planning strategy.

We are fortunate to live among so many generous individuals who continue to prioritize investing in our community’s natural and cultural assets. It is an honor for MCF to be a part of your giving. Thank you for all you do to help keep our community strong today and for generations to come. Please call, email or stop by our new offices downtown if ever we may be of service.

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