Giving to donor-advised funds explodes, Schwab reports

Tax uncertainty over estate and gift tax exemptions fueling surge

Nov 27, 2012 @ 3:24 pm

By Liz Skinner

The uncertainty about tax rules for next year has helped to fuel a 75% increase in contributions to Schwab Charitable's donor-advised fund over the past several months. The fund's chief expects no letup through the end of 2012.

Contributions from July 1 through Oct. 31 were $188 million, compared with $107 million for the comparable period in 2011, according to the philanthropic-services division of Charles Schwab & Co. Inc. And that's typically a slow time for giving.

The six weeks from Thanksgiving until the end of the year are traditionally the greatest for giving as donors face year-end contribution deadlines and choose to provide grants to their favorite charities as part of their holiday traditions, said Kim Laughton, Schwab Charitable's president.

About 60% to 70% of all donations come into Schwab's fund over that period. About $700 million was contributed to Schwab's donor-advised fund in fiscal year 2012, which ended June 30. “We are seeing more activity earlier this year than we've ever seen, and we believe it is being driven by the potential changes in the estate exclusion amounts,” Ms. Laughton said. “People have been consulting with estate-planning professionals, and charitable giving has become a component of that conversation.”

The $5 million estate and gift tax exemption for 2012 will reset to $1 million on New Year's without congressional action, and the inheritance tax rates will rise to 55% in 2013, from 35% this year.

People are talking more about giving during their lifetime, instead of just leaving money in their will, Ms. Laughton said. Additionally, many believe that capital gains are going to increase, so they are taking the gains in 2012 and seeking to offset those taxable gains with deductions for charitable gifts, she said.

“People like certainty,” Ms. Laughton noted. “They want to give it now when it can be more tax advantaged than potentially it can be in the future.”

With a donor-advised fund, an account is operated by a community foundation or nonprofit affiliate of an investment firm, and sponsors have legal control of the assets. The donor makes recommendations on how the money should be distributed.

Ms. Laughton suggests that advisers use the holiday season as a time to bring up philanthropic giving and build a more personal relationship with clients.

“When advisers are helpful in providing clients with simple and tax‐effective ways to support the causes that are important to them, it opens up much more personal conversations and builds tremendous loyalty,” she explained.

The Fidelity Charitable Fund, the nation’s largest such fund, with $7.9 billion in assets, also has seen an increase in contributions this year. About $1.2 billion came in during the first nine months of 2012, an increase of 63% over the same period last year.

The Vanguard Charitable Endowment Program, which has a total of $2.8 billion in assets, reported an increase of 27% in contributions to its donor-advised fund for the 12 months ended Oct. 31, from the previous 12-month period.

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