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April 1, 2021 - Donor-advised funds (DAFs) are vehicles that allow individuals to maximize their charitable impact by giving in a tax-advantageous way. As the vehicle continues to grow in popularity, perhaps you have wondered, "Is a DAF right for me?" In this series, we will highlight case studies of individuals who chose to give through a DAF and why. Among the various benefits we will consider below, perhaps you will find one that is applicable to your circumstances or charitable goals.

1. GIVING NONCASH ASSETS

Fred had appreciated stock that he wished to donate to charity, but his charity of choice was not equipped to receive noncash assets. Fred was planning to sell his appreciated stock, pay the capital gains tax owed on the sale, and donate the after-tax proceeds to his selected charity. Then he learned that publicly traded securities and illiquid gifts that have been held over a year are not subject to capital gains tax when contributed to a donor-advised fund. Fred opened a DAF and was able to contribute his appreciated stock at fair market value to the fund, avoid capital gains tax exposure, and eventually make a grant from his DAF to his selected charity in the full amount of the contributed stock’s fair market value.

Avoiding capital gains tax exposure by contributing appreciated noncash assets to a DAF means more money goes to charity when granted. If you have noncash assets, like securities, real estate, or cryptocurrency, and you wish to benefit a charity that is unequipped to receive them, a DAF might be right for you.

2. GROWING YOUR GIVING

Alice knew the benefits of smart investing. A few years ago, she placed a modest amount of savings in an investment account, and although there were the expected short-term ups and downs along the way, she watched that initial amount grow over time. When Alice first heard of the donor-advised fund, she was intrigued by the possibility of investing for growth her charitable giving. She opened a DAF and began making contributions, which were invested according to her charitable goals. She watched her contributions grow, even as she began to make grants to charity from her DAF. Over time, Alice was able to grant more to charity than she had donated to the DAF. She felt as though she had contributed a sapling but was able to give an orchard.

DAFs allow people to multiply money for charity in a tax-advantaged way. If you are interested in investing your giving for tax-free growth, a DAF might be right for you.

3. BUNDLING CHARITABLE GIVING

Cindy’s charitable giving each year was typically what allowed her to itemize her taxes. But when the standard deductions for taxes were raised in 2017, she was no longer able to meet the threshold to itemize. She decided to “bundle” her charitable giving with a DAF. She contributed several years’ worth of charitable donations in a single year to reach the threshold to itemize, then she waited that period of time to contribute again. In the time between her contributions, she continued to support her charities each year with grants from her DAF.

Charitable bundling can maximize a donor's total tax savings over time. If you are no longer able to realize the benefit of itemizing your taxes and you’d like to consider bundling your charitable contributions to meet the deduction threshold, a DAF might be right for you.

4. MAXIMIZING A FINANCIAL WINDFALL

Peter and Audrey had worked hard to build their business from scratch, and they were finally seeing the payoff with a year of exponential earnings growth. Knowing there would be substantial tax consequences for this financial windfall, they chose to contribute a portion of their proceeds to their DAF, thus lessening their income tax burden while also prefunding years of charitable giving.

A financial windfall is when you receive any amount of income over what you typically receive. Sometimes the windfall is unexpected, like winning the lottery or striking oil, but more often, it's a consequence of an expected event, like selling a profitable business. Either way, a DAF can help you maximize the philanthropic impact of your windfall. If you receive or are expecting a financial windfall, a DAF might be right for you.

5. GAINING MORE TIME

John and Nancy were newlyweds with philanthropic hearts. As they built a life and home together their first year of marriage, they also discussed their charitable goals. At year-end, they were still researching and vetting the charities with which they hoped to become involved. John and Nancy decided to open a DAF so they could go ahead and make their charitable contributions and receive their tax deduction even while they continued their due diligence. The money was in the DAF and ready to be granted once John and Nancy determined which charities they wished to support.

Contributions to a DAF qualify for a tax deduction in the year they are contributed. If you wish to realize the charitable tax deduction of a contribution but need additional time to decide which charities to benefit, a DAF might be right for you.

6. EASING THE ADMINISTRATIVE BURDEN

Rather than focus his charitable giving on a particular nonprofit, Jamal liked to spread out his charity. He wished to support in some way as many organizations as he could that were dear to him and near to him, whether the listener-supported radio station he regularly tuned in to on his commute to work, the local food bank where he volunteered, his alma mater, or the area children’s hospital. He was quick to respond to needs when he became aware of them, eager to write checks at nonprofit fundraisers. Keeping track of all the donation receipts throughout the year for tax purposes was the less exciting, administrative part of his way of giving. When Jamal began funneling all his charitable giving through a donor-advised fund, he was grateful for how it eased his administrative burden. HighGround provides him with one receipt annually that lists all his tax-deductible contributions to his DAF that year. Jamal can focus simply on making his grant recommendations as often and to as many organizations as he wants.

In addition to providing the annual tax receipt, HighGround also performs due diligence on donors’ selected charities for them, processes grants, and mails grant checks to the receiving organizations. If you would benefit from the administrative relief that is provided by streamlining your giving through this vehicle, a DAF might be right for you.

7. PLANNING YOUR GIVING LEGACY

Mark and Janet wanted their estate to make the greatest possible impact on charity and on their loved ones’ lives. They decided to sit down with an estate planning attorney for expert advice. With all the different giving vehicles, each with their own tax implications to consider, it felt like a puzzle to sort out how to best accomplish their goals, but their legal counsel walked them through their options. They learned it can be more tax-beneficial to leave retirement assets to charity, as individual beneficiaries will typically be subject to income tax when bequeathed retirement assets are distributed. They also learned that donating portions of their estate to charity through a giving vehicle would potentially reduce any applicable estate tax. With this information, they were able to determine which of their assets to leave to charity upon their death. However, they knew it was possible they might change their minds down the road about which charities to support, and that would require contacting their attorney and the administrator of their retirement assets or life insurance to modify their named charitable beneficiaries. If instead, they named their DAF as the beneficiary of their assets, then any changes in the future to the charities they wished to support would simply need to be made to their DAF. Mark and Janet opened a DAF and are giving to charity through it even now. But having named their DAF as a beneficiary within their will and of certain assets, they know their charitable impact will extend beyond their lifetimes.

At HighGround, Donor Advisors decide how the funds within their DAFs will be granted to charity upon their passing. Named, trusted individuals may assume the grant recommendation privileges, the funds may be granted out to named charities, or the remaining funds may be used to establish an endowment. Funneling the charitable giving of your estate through one vehicle can also simplify the process for your loved ones and the executor of your will. If you’d like to maximize the charitable impact of your estate while simplifying the process, a DAF might be right for you.

8. GIVING ANONYMOUSLY

As a matter of personal conviction, Brendan wished to give to charity anonymously. He knew he could hire an advisor to act as an intermediary or could work with an attorney to set up a trust through which he could make anonymous donations, but he hoped to avoid the expense of these options. He had begun to leave cash in his church’s offering box, but without a donation receipt, he was forgoing his opportunity to claim charitable tax deductions on his taxes. He was glad to eventually learn that a DAF allows donors to give anonymously, if they so choose. With a quick, online application and initial contribution, he set up his DAF and began to funnel all his giving through the vehicle. Now, Brendan receives a tax receipt for all his DAF contributions and confirmation that his recommended grants have been received by his selected charities – all while remaining anonymous.

If you, like Brendan, would like to give anonymously, a DAF might be right for you.

9. TEACHING GENERATIONS TO GIVE

Michael and Amy have been keen to instill in their children the values of kindness, compassion, and generosity. They have been intentional about weaving volunteerism and philanthropy into the fabric of their family. When they learned how a DAF could help them do this, they set one up and named their young adult children as fellow Donor Advisors. As Donor Advisors, their children could be part of the discussions to determine when and to what organizations grant recommendations should be made from their family DAF. Michael and Amy found that their children became champions of beloved causes and learned to respond to needs as they arose by recommending grants from the money that had already been set aside for charity in the DAF.

Similarly, Robert and Maggie were interested in encouraging giving among the generations in their family. They set up DAFs for each of their young adult grandchildren. Every year at Christmas, they contribute money to these DAFs, and their grandchildren recommend grants from them to charity. One year, their granddaughter requested that her friends donate to her DAF in lieu of giving her birthday presents because she wanted to recommend a grant to a charity close to her heart.

There are a number of ways a DAF can be used to teach generations the values that are important to you. If you are looking to foster meaningful conversations with your family about giving while putting philanthropy into practice, a DAF might be right for you.

10. TRANSITIONING A FOUNDATION TO A DAF

For years, brothers Mike and Matthew had been running the small private foundation their parents created. The administrative needs had become burdensome, but they didn’t feel the size of the foundation justified the cost of hiring staff beyond the legal, tax, and investment professionals they contracted. Meanwhile, their adult children were managing families and careers of their own and were not interested in becoming involved. The brothers decided to transition their family foundation to a DAF, which they named after their parents. With their DAF, all Mike and Matthew have to do is make contributions and recommend grants to charity while HighGround handles the administrative needs and manages the invested funds. Mike and Matthew also named their children as successor Donor Advisors so that their parents’ philanthropic legacy could live on for generations.

Sometimes a family foundation can become too much for family members to manage, and rather than dissolving the foundation completely, transitioning the funds into a DAF allows the family’s giving legacy to continue. Other times, family members find they no longer have the same charitable goals for the foundation’s funds. In these cases, family members might choose to divide the foundation’s assets among multiple DAFs so that each member can be a Donor Advisor, with grant recommendation privileges, of their own portion. If you choose to transition to a DAF, you’ll need to review your foundation’s governing documents and state law before proceeding. Private foundations and DAFs have similarities but are different in a number of ways, and it’s important to consider those differences before making your decision. Even still, if you no longer have the time and resources to manage your family foundation, a DAF might be right for you.

How can HighGround help? In addition to providing legal guidance regarding charitable giving vehicles to help you determine if a donor-advised fund is right for you, we can sponsor your DAF while expertly managing the invested funds within it. Call us today at 214.978.3300.