Wealthy amass record $121 billion in tax-sheltered accounts

More than $37 billion flowed into donor-advised funds last year as tax reform increased interest

Nov 12, 2019 @ 10:08 am

By Bloomberg News

It's better to give than to receive, the saying goes. But to give, receive an immediate tax deduction and then dole out charitable dollars at your leisure is even better, judging by a recent report.

More than $37 billion flowed into tax-sheltered donor-advised funds in 2018, according to the 13th annual report from the National Philanthropic Trust. That's a 20.1% gain over 2017 and means a record $121.4 billion now sits in DAF accounts.

The rate paid out to charities from those accounts, meanwhile, fell to 20.9% in 2018 from 22.8% in 2017, the first time in five years that the rate of growth in contributions outpaced that of grants.

DAFs are individual accounts sponsored by charities such as NPT and units of financial firms like Fidelity Investments, as well as single-cause charities and community foundations.

Gifts of public or private stock, real estate and even cryptocurrency can be given to a DAF sponsor, which takes ownership. DAFs liquidate assets and place proceeds in a giver's account. Account owners choose how the money is divided among investments, and funds compound tax-free until they are sent out as grants.

Tax reform sparked a rush into DAFs, and taxpayers bunched multiple years of planned giving into one year in order to exceed the standard deduction amount, said Eileen Heisman, chief executive officer of NPT, which manages $8.1 billion in DAF accounts.

"Between tax reform and the markets being up, DAF growth was very robust," she said.

The number of accounts formed hit a record, rising 55% in 2018 to 728,563, after increasing 60% in 2017, in large part because more employers offered access to DAF accounts via payroll deductions.

[More: Tax reform changed the way advisers promote charitable giving, Fidelity survey says]

As the DAF industry grows, more sponsors are adding impact investments, Ms. Heisman said. Some, including NPT and Fidelity Charitable, are working with CapShift, a Boston-based company headed by a former president of Fidelity Management & Research Co. CapShift offers impact investments designed for DAFs.

"It's an enormously powerful way to think about the whole amount of capital doing good, as opposed to just waiting for grants to be made," Ms. Heisman said.

[Recommended video: Advisers should discuss ESG with wealthy clients before someone else does]

One issue in the world of giving that concerns her is that while the overall amount given to charity is rising, studies show that about 20 million fewer households gave money in 2016 than did in 2000.

"Higher-net-worth individuals are giving a larger percentage of dollars, and that's not good for civil society or democracy," Ms. Heisman said. "There are still people out there after the recovery from the crash who are not accumulating wealth and don't have extra money to give away. So there are some trend lines in giving that aren't as positive as they could be, and that's a silent part of this report."

[More: Uncharitable giving: How tax reform shrank charitable donations]

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