Americans are known to be philanthropic, with an estimated 83% donating to charitable causes. Making the donation convenient and tax-effective is a win-win for both charities and those with a generous heart. Donor-advised funds (DAFs) are a simplistic funding structure available to those with both small and large charitable giving pots.  

Mechanics of Donor Funds

DAFs can be set up through your investment advisor or a major brokerage firm. The donor transfers securities to a DAF, and is able to receive a tax deduction immediately for the current market value. There is no need to sell the securities first, and the donor does not pay the capital gains tax on the appreciated component of the securities. The donor then chooses from a menu of mutual fund offerings for investment of the proceeds, allowing tax-free growth until the time an allocation to a specific charity is made. If a donor fails to distribute them during his lifetime, he can pass that ability on to his heirs.

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Pros of Donor Funds

Immediate tax deduction, but flexibility on the payout – The DAF allows you to bank your charitable giving going forward. You can donate a large amount, take the tax deduction immediately, then give away pieces of that donated pie according to your own timetable to as many charities as you would like.  

Offers small investors an option historically only afforded to private foundations – Private foundations are typically set up for high net worth individuals. These funds are required to pay out 5% of their assets each year, and have high legal setup and ongoing maintenance costs. They also have less attractive deduction rates than DAFs.   

Ability to donate less liquid assets – DAFs, unlike most charities, will accept illiquid gifts, such as art, land or private and restricted securities. Some even take Bitcoin. The DAF firm will try and sell the asset and credit the funds to the donors account.

Funds continue to grow – Even though the donor cedes control of the assets, he chooses from various investment vehicles for the amount of the proceeds. This allows the funds to grow tax free and, hopefully, increases the amount you can give to charity down the road.  

Cons of Donor Funds

The rapid growth in DAFs has not been equally matched by DAF grants to charities – Apparently investors love the thought of giving to charity when there is a tax deduction, but are less philanthropic when it comes to actually giving the money away Statistics provided by the largest DAF firms suggest payout rates are falling, from about 20% in 2008 to the low to mid-teen rate in 2014. So if you do contribute to a DAF, keep in mind the charity who is counting on your money to do good things. You need to remember to authorize that payment to the charity.

You cede control of assets – In theory you may have liked the timing of your Apple (AAPL) stock donation at the time you made it, but should the stock rally you may have seller’s remorse. Some may prefer to pick the stock they donate at the actual time they want to make a charitable gift, thereby avoiding looking in the rear view mirror.  

You may not like fund choices – Just like a 529 plan, you are limited to whatever options your fund manager offers. You may find the funds too aggressive, too conservative, or just sub-par in their historic returns. Do your homework and evaluate the preselected options of funds before you decide where to set up your DAF.

Charitable giving is an American tradition. Finding ways to incent donors to give more in a tax-efficient manner benefits both charities and investors. With the stock market at an all-time high, many investors are sitting on substantial capital gains in their accounts. DAFs are an attractive and timely option to consider.

To read the full article, visit ptview.com/articles/2018.

Note: Elaine Phipps, MBA, CFA, is a Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.

For nearly 25 years, Point View Wealth Management, Inc. has been working with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals.  Click here to contact David DietzeJohn PetridesClaire TothDonna St.Amant, and Elaine Phipps, or call 908-598-1717 to learn more about Point View Wealth Management, Inc. and how we can help you and your family meet your financial objectives. To sign up for our complementary commentaries and newsletters, e-mail us at firm@ptview.com.

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