As the friendly billionaire next door will tell you, setting up a charitable foundation is hard work. It can take weeks or even months and the to-do list includes a) find board members, b) print up lots of glossy brochures, and c) rent out a fancy banquet hall for the kickoff soiree.
Then there’s the donor-advised fund: the fast-food drive-though lane of philanthropy. You can set one up in a day or two with as little as $5,000. And who needs a soiree when you can buy an extra order of fries to celebrate your new charitable arm? Plus, you get to rack up tax savings. (Make that two orders of fries, please.)
DAFs made headlines in December after the House and Senate passed their sweeping tax overhaul. The three major providers of donor-advised funds — Charles Schwab, Vanguard Group and Fidelity Charitable — reported a high volume of new accounts, contributions and grants to charitable organizations.
Changes in tax law raised standard deductions to $12,000 for individuals and $24,000 for married couples. Granted, taking advantage of that perk means no deductions for charitable contributions. But with DAFs, taxpayers can take one large deduction in the year they set it up, even if the money doesn’t get distributed right away.
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“The higher standard deduction for 2018 income taxes encourages donating more this year to get a tax deduction,” says Andrew M. Aran, partner, Regency Wealth Management in Ramsey, New Jersey. “Those with donor-advised fund contributions get to deduct the donations in 2018 and then gift money to charities over time.”
So what is a DAF? A donor-advised fund is a philanthropic vehicle that allows donors to make a lump-sum charitable contribution and then recommend grants from the fund. And indeed, the tax advantages largely explain why their popularity has soared in recent years.
The amount of donor-advised funds as a percentage of total individual giving nearly doubled between 2010 and 2016 — from 4.4 to 8.3 percent, according to the National Philanthropic Trust, a public charity that provides expertise to donors, foundations and financial institutions.
Today, the average size of a DAF account runs just shy of $300,000; 2016 ended with about 285,000 accounts, up 18 percent from 2014. And every year sees a record shattered from the year previous. The all-time high of $85.15 billion in DAFs (2016) was not long ago an all-time high of $44.71 billion (2012).
Yet donor-advised funds have come under fire in some circles. For starters, investment firms heavily market DAFs as an easy alternative to setting up foundations: the upshot being that they collect easy administrative fees.
Meanwhile, a “giver” can let the money languish in their DAF indefinitely, without a penny distributed in their lifetime (even though those funds must ultimately be spent on charitable programs and services). The Boston Globe once characterized DAFs as the place “where charity goes to wait.”
Perhaps the loudest DAF naysayer is Lewis B. Cullman, who wrote an extremely critical piece for The New York Review of Books in 2014: “If the donor never gets around to making contributions, [the money] stays in the account earning substantial fees for investment managers,” he wrote.
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And Cullman is neither an investment nor philanthropic slouch. In 1964, he and a colleague pulled off the first-ever leveraged buyout when, with just $1,000 cash, they bought Orkin Exterminating Co. for $62.4 million (easier than squashing a bug, you might say).
In the last 25 years, Cullman has given away more than $500 million. Now 98, this articulate tycoon hasn’t softened his views on DAFs one jot. “To me, the best way to donate is to pick a charity you like and give it directly to that charity,” he says. “Why do you need a middleman?”
Still, enthusiasm for DAFs clearly shows no signs of slowing down, though interested parties should pause to consider pitfalls that are all too easy to miss.
“DAFs are subject to certain restrictions that apply to private foundations,” says Carol Kroch, national director of philanthropic planning at Wilmington Trust, based in Wilmington, Delaware.
“For example, although a DAF can accept a gift of closely held stock, like a private foundation, it is not allowed to hold the stock long term,” Kroch says. “A DAF is also not a good vehicle for funding events, such as a charitable gala, where the donor will attend and receive benefits from the donation.”
That noted, DAFs done right can teach valuable lessons that span generations of families from less-than-fabulous means.
“DAFs can make charitable giving fun and educational for the whole family,” says Max Haspel, principal and senior wealth advisor at The Colony Group in Babylon, New York. “It’s not uncommon for parents or grandparents to use DAFs to teach or reinforce family values. They can be used to teach important initial lessons about money and be a positive bonding vehicle across and among generations.”
Moreover, some perks cannot be denied — and frankly, can’t be assigned a strict dollar value, even though they’ll make you feel like a million bucks.
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“One very cool feature of a DAF is that it can be named almost anything — without ever creating an actual foundation with all the administrative encumbrances a foundation brings along with it,” says Sarah Lewis, principal at Aequitas Wealth Management in Los Angeles.
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Donor-Advised Funds in Spotlight originally appeared on usnews.com
