The landscape for charitable giving changed with the new tax law, but we are seeing that clients – with or without a tax write-off – still want to give to their favorite organizations and charities. After all, we give to support causes we cherish and to show gratitude for good fortune we have enjoyed. Financial incentives are nice, but not usually your main motivation for giving. That said, a tax break can feel good too, and it may help you give more than you otherwise could. There are a few strategies for the new world.
The Tax Cuts and Job Act of 2017 did not eliminate the charitable deduction. You can still take it when you itemize your deductions. But the law limited or eliminated several important itemized deductions, as well as doubled the standard deduction (now $12,000 for single and $24,000 for joint filers). With these changes, there will be far fewer people for whom it will make sense to itemize deductions instead of just taking the now-higher standard allowance.
This introduces a new incentive to consider “batching” your deductible expenses, so they can count toward reducing your taxes due every other year – at least in the years you’ve got enough itemized deductions to exceed your standard deduction.
For example, if you usually donate $5,000 annually to charity, you could instead donate $10,000 in one tax year every other year, maybe in January then the following December, to maximize the impact of the contribution on your tax return. Combined with other deductibles, you might then be able to take a nice tax write-off that year, which may generate (or be generated by) other tax-planning possibilities.
The donor-advised fund (DAF) is a tool for continuing to give meaningfully and tax-efficiently under the new tax law. They are not new; they’ve been around since the 1930s. But they’ve been getting more attention lately as an appropriate tax-planning tool under the TCJA. Here’s how they work:
- Make a donation. Donating to a DAF, which acts like a “charitable bank,” is one way to batch up your deductions for tax-wise giving. You can then give annually to your causes. But remember: DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
- Deduct the full amount in the year you fund the DAF. DAFs are established by nonprofit sponsoring organizations, so your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can give your initial donation more giving-power over time.
- Participate in granting DAF assets to your charities of choice. Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go.
So you might prefer donating through a DAF if you want to make a relatively larger donation for tax-planning purposes, you’d like to retain a say over what happens next to those assets, but you’re not yet ready to allocate all the money immediately to your favorite causes.
Another common reason people turn to a DAF is to donate appreciated stocks in kind (without selling them first and having to pay capital gains tax), especially when your intended recipient can only accept cash or liquid donations.
A DAF isn’t for everyone. Along the spectrum of charitable giving choices, they’re relatively easy and affordable to establish, while still offering some of the benefits of a planned giving vehicle. So they fall somewhere between simply writing a check, versus the time, costs and complexities of a charitable remainder trust, charitable lead trust, or private foundation. (That said, those planned giving vehicles offer important features that go beyond what a DAF can do for a family that is interested in establishing a lasting legacy.)
How Do You Differentiate DAFs?
If you decide a DAF would be useful to your cause, the next step is to select an organization to sponsor your contribution. Sponsors typically fall into three types:
- Public charities established by financial providers, like TD Institutional or Fidelity
- Independent national organizations, like the American Endowment Foundation and National Philanthropic Trust
- “Single issue” entities, like religious, educational or emergency aid organizations
Within these categories, DAFs are not entirely interchangeable. Some key considerations:
Minimums – DAFs have different minimums for opening an account.
Fees – As with any investment account, expect administration fees. Just make sure they’re fair and transparent, so they don’t eat up all the benefits of having a DAF to begin with.
Acceptable Assets – Most DAFs will let you donate cash as well as stocks. Some may also accept other types of assets, such as real estate, private equity or insurance.
Grant-Giving Policies – Some grant-giving policies are more flexible than others. For example, single-entity organizations may require that a percentage of your grants go to their cause, or only to local or certain kinds of causes. Some may be more specific than others on the minimum size and/or maximum frequency of your grant requests. Some have simplified the grant-making process through online automation; others have not.
Investment Policies – DAF assets are typically invested in the market, so they can grow tax-free over time. But some investments are far more advisable than others for building long-term giving power.
Transfer and Liquidation Policies – What happens to your fund when you die? Some sponsors allow you to name successors if you want to continue the fund in perpetuity. Some allow you to name charitable organizations as beneficiaries. Some have a formula for distributing assets to past grant recipients. Some will roll the assets into their own endowment. (Most will at least do this as a last resort if there are no successors or past grant recipients.)
TD Institutional has a partnership with the American Endowment Foundation to provide preferred pricing, and to allow us to manage and administer a customized portfolio. Donor advised funds are available to our clients there with an initial contribution of $100,000. Donors have web access to their account via the endowment’s website, where they can see grants as well as gift history and account balances.
**The deadline for opening a new Donor-Advised Fund for the current year is December 14, 2018. Gifts must be funded by December 31, 2018. If a donor wants to recommend grants out of a newly created fund, the DAF needs to be created no later than the first week of December to ensure there is time to book gifts (10 business days) as well as then process grants (another 10 business days).