Interest in donor-advised funds surges in response to tax changes

Clients still have time to set up accounts before year-end, but some contribution deadlines have passed

Dec 20, 2017 @ 2:15 pm

By Mary Beth Franklin

With Congress passing the most sweeping tax law changes in a generation, the three major providers of donor-advised funds — Charles Schwab & Co. Inc., The Vanguard Group Inc. and Fidelity Charitable — report a high volume of new accounts, contributions and grants to charitable organizations.

Although the tax bill, which was approved by both the House and Senate this week, does not remove the ability to deduct charitable contributions from taxes, it raises the standard deduction and reduces many itemized deductions, which will prompt many taxpayers who currently itemize to take the increased standard deduction.

President Donald J. Trump is expected to sign the bill into law before Christmas.

Today, only about 30% of taxpayers itemize their deductions, according to the IRS. Fewer than 10% of taxpayers are expected to continue to itemize as a result of the new tax law that will boost the standard deduction to $12,000 for individuals and $24,000 for married couples. Those who take the standard deduction, rather than itemizing, cannot deduct their charitable contributions from their income taxes.

"For people who will no longer itemize their deductions, it makes sense for them to open a donor-advised account and pre-fund a number of years of giving," said Kim Laughton, president of Schwab Charitable. "You can separate the tax decision from the giving decision and decide where to give later or to give over time.

"Appreciated assets make the most tax-efficient gift, particularly as people are looking to rebalance their portfolio" following this year's healthy stock market performance, Ms. Laughton said.

(More: Top changes in the tax bill that will affect financial planning)

A donor-advised fund allows donors to contribute cash, appreciated assets or investments that have been held for a year or more without paying capital gains taxes. Taxpayers can take one large deduction in the year of the contribution and then spread out distributions to the charities of their choice over multiple future years.

Schwab and Fidelity require a minimum $5,000 to open a donor-advised fund. Vanguard's minimum is $25,000. All three providers charge a 0.6% annual administrative fee plus underlying investment fees.

Since the beginning of the fiscal year on July 1, Schwab reports a 59% increase in new donor-advised fund accounts for a total of 4,500 new accounts. Business was particularly brisk during the gift-giving month of December with a 68% increase in new accounts over the previous year, Ms. Laughton said.

Vanguard reported a similar increase in donor-advised fund activity this quarter, including a 45% increase in new accounts, a 41% increase in the number of contributions and a 40% increase in the number of grants to charities compared to 2016. More than 80% of the gifts from Oct. 1 through Dec. 12, 2017, were non-cash assets, including appreciated securities.

"While some donors are asking about the impact of tax reform on their charitable giving, there's no way to tell for sure if some of these numbers are fueled by pending tax law changes," said Linda Wolohan, PR manager at Vanguard.

"We are seeing a high volume of both contributions and grants," said Eric Sandwen, media coordinator at Fidelity, but he did not supply specific numbers.

Although there is still time to set up a donor-advised fund by year-end in order to claim a tax deduction for 2017, the deadline has already passed for contributing certain types of assets which take longer to process than others.

At Fidelity, checks can be contributed to a Fidelity donor-advised fund as late as Dec. 30 and assets held at Fidelity Charitable can be transferred up to Dec. 31 or postmarked by Dec. 30 if contributions are sent by mail. But if you want to contribute bitcoins, you'd better hurry. The deadline is Dec. 22. You have until Dec. 26 to initiate a transfer of publicly traded securities from another firm and until Dec. 28 for wire transfers.

(More: Final tax bill gives pain, relief to financial advisers)

Vanguard will accept checks and stock certificates as late as Dec. 31, but if you want to transfer securities or mutual funds from a Vanguard account to a donor-advised fund, you must do so by tomorrow, Dec. 21. The recommended contribution deadline to transfer securities and mutual funds held outside of Vanguard has already passed, but it doesn't hurt to ask.

The deadline to transfer mutual funds and stocks held outside Schwab to a Schwab donor-advised fund has already passed, but electronic fund transfers will be accepted through Dec. 28. Assets held at Schwab can be contributed until Dec. 29 and checks by Dec. 31.

Hannah Basil, a financial planner with the Basil Financial Group in Chicago, said she has been recommending donor-advised funds to her clients long before tax reform.

"It's a great way to make sure your charitable-minded clients can meet their goals and manage the tax impact of appreciated assets," Ms. Basil said. In addition, contributions to donor-advised funds, which are liquidated and invested in pooled accounts, can continue to grow over the years, allowing donors to make sizable gifts to their preferred charity, sometimes with naming rights, down the road.

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