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.”
According to the National Philanthropic Trust, contributions to donor-advised funds in 2018 totaled $37.12 billion, an all-time high, up from $30.9 billion in 2017. Grants from donor-advised funds to charitable organizations also reached a new high of $23.42 billion in 2018, up from $19.7 billion in 2017.
“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
What makes a DAF so popular? Walker 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,” she says.
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 Walker.
There are typically no start-up costs associated with a DAF, beyond the individual’s initial contribution to the fund. 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. Deductibility by year should be discussed with your tax advisor.
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, it’s often the case that a DAF is part of the ultimate plan. Indeed, a DAF can be a great intergenerational charitable wealth transfer vehicle. The key is to have your financial advisor, tax advisor, legal advisor and philanthropic advisor – along with your 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.