Donor-advised funds gain tax-planning popularity

Waiting until December to contemplate your 2018 charitable giving? If so, you are not alone. According to NP Source, 30 percent of all charitable giving is performed in the final month of the year. This year, spurred by new tax law provisions, more donors than ever are finding donor-advised funds (DAFs) to be a wise tax planning strategy.    

That’s far from the picture The New York Times tried to paint in August of this year, when it inexplicably framed DAFs as a loophole by which extremely wealthy Americans can “hack their taxes.”  A few key statistics reveal a very different reality.    

While DAFs serve a purpose similar to private foundations, they are much easier and significantly more affordable to set up. This means they provide a planning strategy benefiting tens of thousands of donors — not just an elite group of the ultra-wealthy.  The IRS mandates a 5 percent annual distribution from private foundations.  Donor advised funds have no such mandate, yet they distribute over 20 percent annually on average.  The Times failed to mention this fact in its unfortunate attempt to characterize DAFs as a place to essentially hide charitable contributions that may never get into the hands of the needy.

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Don’t believe it.

Once a contribution is made to a DAF, the donor has irrevocably parted with the donated asset and can no longer use it for non-charitable purposes. So, exactly what the incentive for hiding contributions in this manner would be was not explained by The Times. 

DAFs are simply designated gifts to nonprofit organizations — often a local community foundation — whereby the donor reserves an ongoing ability to advise the nonprofit regarding grants distributed from the fund.  DAFs allow donors to contribute into the fund and receive a charitable deduction at a strategic time.  The money in the fund is invested and grows tax free, and the donor may advise the nonprofit to make grant distributions to charitable organizations at any point. 

DAFs are amazing planning tools that encourage generosity and benefit the entire nonprofit sector. Nationally, there is over $100 billion in DAFs, and DAFs distributed 22 percent of their total market value in 2017 — far more than the 5 percent mandated for private foundations.  The Community Foundation of Northern Colorado manages approximately $114 million in charitable assets, half of which are held in DAFs ranging in size from $25,000 to $10 million.  In its last fiscal year, the foundation distributed more than $12 million in grants to hundreds of charitable causes, which is over 10 percent of total assets.  DAFs greatly enhance philanthropy here in Northern Colorado, making it easy for donors to plan and organize their giving.    

With the new tax law, timing issues regarding charitable deductions are more important than ever, and DAFs are increasing in popularity. Last year, $29 billion was donated to DAFs, up 16.5 percent from the previous year.  Many donors who do not have DAFs are “bunching” their donations, in some cases doing twice their normal charitable giving in one year while skipping the next. DAFs greatly enhance this strategy, allowing donors to transfer assets into the fund and receive a charitable deduction at the most strategic time, while distributing grants out of the fund on an ongoing basis to the causes they wish to support.   

The New York Times focused on a $500 million gift of GoPro stock to the Silicon Valley Community Foundation by GoPro founder Nicholas Woodman, implying that DAFs are merely a tax planning tool for the “elite.”  The Gray Lady ignored the fact that the average size of DAFs continues to decline precipitously as a far broader group of donors find them to be helpful. This growing popularity is simply a reflection of wise planning, with the ultimate beneficiary being the millions of people served by the many nonprofits, schools, and faith-based organizations that shape the fabric of American culture.

Ray Caraway is president of the Community Foundation of Northern Colorado.