It is reported that after his parents died, Saint Nicholas distributed his inheritance through secret gift-giving. On one occasion, he left three bags of gold coins, each as a dowry for a family’s three daughters to provide a better life. Sinterklaas became a traditional model for gift-giving during the year-end holiday season.
While Santa Claus has become a commercial success, Americans remain the most generous nation on earth. According to GivingUSA, 60 percent of households participate in charitable giving, having donated a record $471 billion to charity in 2020. Only 20 percent of all charitable donations come from corporations.
Most charitable gifts are given directly via cash or check. However, there are better ways depending on your charitable goals that can lead to higher tax savings.
Donor-Funds
Donor-advised funds are an investment vehicle that enables significant charitable gifts over a long period of time. Similar to foundations, they require less time, fees, legal assistance and administration to establish and maintain.
A donor-advised fund (DAF) is an agreement between a charitable administrator and a donor, which enables a donor to advise the administrator on how the charitable funds will be distributed to other charities. The donor makes nonbinding grant recommendations to the administrator for charitable causes they wish to support. The donor can also advise the administrator as to how to invest the funds. While the administrator is not obligated to follow the recommendations, I’ve found in practice fund administrators follow the donor’s wishes and serve to keep the fund compliant with the rules governing DAFs.
A few key notes on DAFs:
- Contributions are tax-deductible in the year they are made and can result in an immediate tax deduction if a donor itemizes deductions.
- Cash donations are limited to 60 percent of adjusted gross income (AGI), while gifts of appreciated property are limited to 30 percent of AGI.
- The DAF (administrator) must own the funds and have ultimate control over distributions.
- Grants to recipients from the fund can identify the donor or be made anonymously per the donor’s request.
Practically Speaking …
As a CFP® professional, I’ve found donor-advised funds are a simple solution to several issues.
- Clients give the capital gain of appreciated stock to the DAF. Rather than giving cash to charity, they rebuy the gifted stock in their investment account and establish a new (higher) cost basis.
- The gifted stock can remain in the DAF indefinitely, as there is no requirement to make annual grants. As such, investments in DAFs can grow to support higher, future grants.
- DAFs can receive privately held business shares prior to a sale of a company. With charitable intent, a seller can also minimize gain on the sale.
- They can also facilitate last-minute gifts at year-end. Many times, donors aren’t sure (or haven’t vetted) to which organization they want to give, but they desire a tax deduction due to unexpected income (such as a bonus). The fund can receive a donation for tax purposes, while the donor determines a gift at a later time.
- Additionally, fund administrators are often a great resource for information regarding charities to whom a donor wants to make a grant, often vetting a grantee’s stewardship of received gifts and operating expenses.
Finally, I’ve found DAFs can be used to transfer family values through charitable giving discussions. I meet with my wife and children on Black Friday every year, and we each bring recommendations for causes we care about. Through these discussions, we’re able to educate our children on finances, the importance of generosity, and the particular issues we want to participate in as a family. Our team would like to guide you through the details if you have any questions prior to year-end.
By Doug Feller, CFA, CFP (Investment Partners)