The Rockefellers. The Waltons. The Pulitzers. The Fords. These are the well-known families that left a legacy through the empires they built. But they also left a lasting legacy through the many causes and organizations that still thrive today due to decades of philanthropy.
Many funded their philanthropic endeavors by establishing private family foundations. And while private charities remain a popular option, a growing number of high net worth and affluent families are turning to donor-advised funds (DAFs) to maintain their family tradition of philanthropy.
“DAFs are a hot topic this year among the families we work with,” says Catherine Walker, senior trust consultant at RBC Wealth Management-U.S. in Wilmington, Del. “They are emerging as a more affordable and easier-to-establish option for families that want to give back over time, but don’t want to invest the time or money that private foundations require.”
The growth is quite remarkable. Between 2010 and 2014, the total number of DAF accounts rose 29 percent to 238,293, according to the National Philanthropic Trust. Moreover, the value of those assets more than doubled over that time, hitting $70 billion. And grants from DAF accounts to charitable organizations reached a new high in 2014, rising to $12.49 billion.
“Charitable giving in the U.S. hit an all-time high last year,” says Walker. “And DAFs were certainly a part of that.”
As easy as 1, 2, 3
“In addition to families hoping to leave a legacy, DAFs are popular among other high net worth individuals,” says Bill Sternberg, a philanthropic advisor at the Minneapolis Foundation. “They’re a viable option for highly compensated corporate executives, whose salaries and stock awards may exceed their needs; families with highly appreciated marketable securities, closely held stock, or real estate assets; and those who’ve had the good fortune of realizing the cash proceeds from the sale of a family business.”
What makes a DAF so popular? Sternberg suggests it’s due in large part to the flexibility it offers, and the ease with which an individual, family or business can establish a fund. “You can establish a DAF today and begin making grants from it tomorrow,” he says. The Minneapolis Foundation is one of many community foundations around the country that create and administer DAFs.
To create a DAF, an individual must work with a “parent organization,” such as a community foundation or another qualified 501(c) (3) non-profit organization that essentially acts as the administrator of the fund over the fund’s lifetime.
The parent organization handles the set-up, the accounting, the investment management of the assets, and the vetting of the individual nonprofit organizations to which the donor wishes to recommend their grants. But administration isn’t their only role.
“We help people who establish a DAF to articulate their charitable goals, and then realize those goals by supporting organizations that serve that purpose and align with their core values,” says Sternberg. “Think of us as the philanthropic advisor.”
There are typically no start-up costs associated with a DAF, beyond the individual’s initial contribution to the fund, which, depending on where the account is established, may be as low as $5,000. The parent organization charges an administration fee to the DAF, usually based on a percentage of assets held.
Then there is the question of what assets an individual or family should contribute to the DAF. Many high net worth individuals make contributions of cash – perhaps proceeds from the sale of a business or another large asset sale, says Walker. But contributions of appreciated securities and real estate are also tax-advantageous ways people choose to contribute to their fund.
One of the great advantages of a DAF is that donors may use the fair market value of the gift in the calculation of their charitable income tax deductions on all of their contributions to the fund, Walker says. So a gift of $200,000, whether cash or appreciated securities, will permit the use of the full market value of $200,000 in the calculation of the charitable income tax deduction, notes Sternberg.
Additional contributions can be made over time not just by the original donor, but by anyone who chooses to donate to the fund. Those contributions may also qualify for a charitable income tax deduction.
Flexibility in giving
In addition to the income tax benefits, DAFs afford donors flexibility in how they want to give back. Walker points to a client who, a few years ago, wanted to contribute to the work of a researcher who was exploring a rare genetic anomaly that his own grandfather had died from.
“His initial hope was to give a large, one-time gift to the hospital where the researcher was conducting his work,” Walker recalls. “Just before he wrote the check, I asked him to consider setting up a DAF fund that would allow him to make multiple smaller contributions to the hospital over the course of several years.”
The last-minute change of strategy turned out to be fateful for the donor. Less than a year later, the researcher moved to a different hospital.
“Had he proceeded with the lump-sum gift to the hospital, he would have locked himself into funding the institution – instead of the research that was so near and dear to his heart,” says Walker. “With a DAF, he was able to recommend grants to the new institution where the researcher was continuing his work.”
DAFs also offer families an easy way to get future generations involved in philanthropy.
For instance, the matriarch of a wealthy Vermont family, and another of Walker’s clients, established a DAF not only to realize her charitable giving goals, but also to teach her grandchildren about philanthropy.
Each year, she would ask her five grandchildren to help allocate some of the money in her fund. But she didn’t allow them to pick their charity at random. Instead, she required each grandchild to give a formal presentation, making the case for their charity.
“She encouraged them not only to consider the charity’s mission, but also how it was run and how it spends its money,” Walker says. “Essentially, she was preparing them to take a more active role in directing grant activity from the fund in the future.”
Determining how the next generation will uphold a family’s philanthropic legacy is a nuanced conversation that begins before charitable structures are even considered. But, Sternberg observes, it’s often the case that a DAF is part of the ultimate plan.
“A DAF can be a great intergenerational charitable wealth transfer vehicle,” he says. “The key is to have the financial advisor, the tax advisor, the legal advisor and the philanthropic advisor – along with the kids and grandkids – all take part in the discussion.”
This material is not intended to replace the advice of a qualified tax advisor, attorney, and accountant or insurance advisor. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.