Tax reform debate sparks fresh interest in donor-advised funds

Schwab reports new accounts up 50% from last year, assets up 33%

Nov 21, 2017 @ 1:00 pm

By Jeff Benjamin

The battle over tax reform in Washington has not been lost on financial advisers and investors looking to take advantage of existing charitable-giving rules.

Kim Laughton, president of Schwab Charitable, said assets in donor-advised funds are up 33% over the past year, and new accounts are up 50%.

"People are wanting to give ahead of any tax-law changes," she said, adding that tax laws related to charitable giving have historically been left untouched.

Under both the House and Senate tax bills, charitable contributions would still be deductible. But by roughly doubling the standard deduction, both bills would likely reduce the number of taxpayers who would itemize, and that's the only way you can claim charitable deductions.

The latest surge in activity in donor-advised funds, which allow investors to make tax-deductible contributions in any tax year and spread out the actual donation to charities over time, follows the surge seen following last year's presidential election.

Prior to last year, Ms. Laughton said the last time she saw this kind of interest in donor-advised funds was in 2012 when investors were making contributions ahead of the new taxes from Obamacare.

"Certainly, when there is talk of tax changes, people want to lock in the current benefits," she said.

At $11 billion, Schwab Charitable is among the largest players in the nearly $90 billion donor-advised funds space.

Ms. Laughton estimates that Schwab's donor-advised funds will bring in $3 billion and grant out $2 billion in 2017.

Fidelity Charitable, which is the largest provider of donor-advised funds at more than $16 billion is also experiencing increased activity.

Fidelity couldn't provide 2017 data, but a spokesman said the increased interest this year is comparable to the spike in interest last year following the surprise election of Donald Trump, who had campaigned on tax reform.

In 2016, Fidelity Charitable received $6.9 billion in contributions, up from $4.1 billion in 2015.

Fidelity's donor-advised funds granted $3.5 billion last year, up from $3.1 billion in 2015.

Donor-advised funds represent about a quarter of the $390 billion counted as all charitable donations, according to Giving USA.

Between 75% and 80% of donor-advised fund assets come in through financial advisers.

As Ms. Laughton explained, the appeal of donor-advised funds is also gaining traction because of where we are in the market cycle.

Nine years into a bull market for stocks, there are a lot of appreciated assets that can be contributed to a donor-advised fund for maximum tax advantage.

While cash is considered the most expensive way to donate to charity, investors can donate up to 50% of their adjusted gross income in the form of cash, and the equivalent of up to 30% of adjusted gross income can be donated in the form of securities.

"Advisers really understand the tax issues, and they can think ahead about how to best make contributions," Ms. Laughton said.

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