Charitable giving through donor-advised funds on rise

Fidelity, Vanguard and Schwab all seeing increases in grants through DAF accounts

Apr 6, 2018 @ 3:56 pm

By Jeff Benjamin

The spirit of giving appears to have enjoyed a short-term boost thanks to a confluence of factors, including December's tax-reform package.

Grants from donor-advised funds — which allow account holders to receive a tax deduction immediately, but delay making donations until a later time — are on the rise since President Donald J. Trump signed the Tax Cut and Jobs Act of 2017.

"With the tax-law changes, one of the things that is still allowed is charitable giving, and with donor-advised funds you can get the immediate tax deduction without having to give money out every year," said Jeff Leventhal, managing director and partner with HighTower Bethesda, which manages $950 million.

Timothy McGrath, managing partner at Riverpoint Wealth Management, a $400 million advisory firm, said the tax-law changes will likely have a greater impact on charitable giving going forward.

In addition to increasing the amount that can be contributed to 60% of adjusted gross income, up from 50%, the new tax law also doubled the standard deduction for a married couple to $24,000, which means fewer people will be itemizing their charitable deductions.

"The big deal is the increase in the standard deduction, which means you have to do some forecasting and maybe you end up bunching some contributions up in a single year so you can meet the higher deduction threshold," he said.

Donor-advised funds make this possible, which is why Mr. McGrath speculates that contributions to the funds might "ebb and flow" from one year to the next and people manage their charitable donations for optimal tax management.

According to a report from Fidelity CharitableFidelity Investments' donor-advised fund and the nation's second-largest grant maker behind the Bill & Melinda Gates Foundation — other factors driving charitable giving include high-profile disaster relief needs, strong financial markets and the appreciation of complex assets like cryptocurrencies.

Fidelity Charitable hit a record $1 billion in grants this year through March 13, a 42% increase over the same period in 2016.

"Philanthropy has become part of the day-to-day culture of the American population," said Elaine Martyn, managing director of the private donor group at Fidelity Charitable. "The simplicity of donor-advised funds has helped drive growth, because when you see a crisis, you can respond quickly because you've already set that funding aside. With the click of a few buttons you can immediately take action and donate to a cause you care about."

While first-quarter data is not yet available for Vanguard's donor-advised fund, the fund reported more than 660,000 grants and more than $874 million in donations in 2017, compared with 561,000 grants, and $685 million in donations, the year before.

"We're seeing an uptick in both the donations to donor-advised funds and in the granting to charities from the funds," said Vanguard Charitable president Jean Greenfield.

The pickup gained momentum in December.

During the month, which included political wrangling over the first major tax-reform package in more than 30 years, the number of new accounts opened at Vanguard Charitable topped 2,300, a 245% increase over December 2016.

Also, during that December boost in activity, more than 80% of contributions to Vanguard Charitable's donor-advised funds came in the form of noncash assets such as appreciated securities, restricted stock and real estate.

Ms. Greenfield said in most years, appreciated assets account for about half of all donations into the donor-advised funds.

Grants to charities from the funds in December topped $160 million, marking a nearly 38% increase over the prior December.

"On the contribution side, there was the whole tax-reform issue, and philanthropists didn't really understand the impact on charitable giving until the last two weeks of the year," Ms. Greenfield said.

For financial advisers working with clients that have philanthropic objectives, donor-advised funds are considered ideal because they allow for tax deductions at the time of the contribution, but the granting of the money can be made at the discretion of the donor, which could be years down the road.

According to Fidelity Charitable's research, generally, when a dollar is allocated to a donor-advised fund, 38 cents of that dollar is granted out within a year, and within five years, 78 cents of that dollar is granted.

As investment vehicles, the donor-advised funds are designed to grow once the money is donated, while waiting to be granted to a qualified charitable organization.

Regardless of how the assets perform inside the donor-advised funds, the tax deduction is set by the amount of the original donation.

Schwab Charitable did not disclose the actual dollar amounts, but reported a 25% increase in the amount granted and a 32% increase in the number of grants to charities in the first quarter, compared to the same quarter last year.

"One of the reasons donor-advised funds continue to grow is that they offer donors and advisers a convenient and tax-smart solution for charitable planning with noncash assets under the new tax rules," said Fred Kaynor, vice president of business development and marketing at Schwab Charitable.

"In 2017, over 70% of contributions into Schwab Charitable accounts were appreciated, noncash assets, which tend to be the most tax-efficient charitable donations," he added. "Many of these noncash contributions are facilitated by advisers, and many donors are still holding assets that have appreciated significantly over the last five years. Under the new tax law, donors can still eliminate long-term capital gains taxes on the sale of appreciated assets by donating them, which increases the amount available for charity by as much as 20%."

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