I first wrote about donor-advised funds, or DAFs, after the 2008 stock market crash. Many of those points still hold true today, but this time feels different because of the novelty of a global pandemic, as opposed to purely a financial crisis, and the uncertainty about its eventual magnitude and duration.
While philanthropy has always played a role in aiding during a crisis, this time it feels especially meaningful. Considering the current COVID-19 situation, many non-profits and charities are struggling to meet their needs due to the economic impact now. They also face the added challenge of forecasting when it will be over.
Help Is on the Way
The good thing is that there are many efforts under way to support nonprofits. My colleague, Carla Wigen, LNWM’s Managing Director of Fiduciary Strategy, was recently interviewed by The New York Times on strategic ways to donate (How Philanthropists Are Giving During the Crisis). She strongly urges philanthropists to disperse funds from donor-advised funds, as a quick and effective way to make a difference right now.
This is what Carla said, and I totally agree with her:
“Don’t let DAFs just sit there. Now is the time to be making distributions. After 2017, many people front-loaded charitable contributions into DAFs to be above the new standard deduction so that they could deduct their charitable contributions. The DAFs are not required to distribute each year and some of them have funds sitting that the owners could go ahead and direct to charities. So, if you’ve made a pledge to your local charity, now would be a good time to make that contribution as many are struggling to pay their employees.”
New to DAFs
If you want to open a new DAF, a good first step may be to contact the non-profit you want to help and ask them what their current needs are and what the best strategy and timing is for giving. If you know the specific organization(s) you want to get involved in, a self-directed DAF approach has lower minimums and fees and can be easily set up through a large institutional partner, like Charles Schwab or Vanguard.
However, if you’re unsure of where you’d like to direct your funds, partnering with a foundation to help research an area of interest and potential non-profits that fit your objectives may be a good idea.
The Seattle Foundation, with which we work closely, and other types of community-oriented non-profits can handle all the paperwork and asset transfers. Or you can opt to go through the charitable divisions of for-profit financial firms.
For ideas and strategies on giving, read this call-to-action by Beth McCaw, President and CEO of the Washington Women’s Foundation.
The Ins and Outs of DAFs
What you can give. If you have something of value, chances are DAFs can accept it as a donation: cash, real estate, marketable securities (stocks, bonds and mutual funds), collectibles and other personal property, and even closely held business interests.
Timing and flexibility. DAFs allow you to give now, but also to plan and time future contributions. This may be more vital than in the past, due to the constantly evolving situation and uncertainty we’re facing.
The tax benefits. You can claim a tax deduction for the total amount you transfer to the DAF in the year you do so. For the 2020 tax year, cash donations are deductible up to 60% of your adjusted gross income (AGI). Gifts of appreciated securities and other assets are usually deductible at the current, full market value – up to 30% of your AGI. Additionally, you won’t pay a capital gains tax on donating appreciated assets, which can save you an additional 15-20%.
Note that if you donate assets that are valued at more than 30% of your AGI in any one year, you can carry the excess charitable deduction forward for up to five years.
No time limit on disbursements. The money in the DAF is invested by The Seattle Foundation or other DAF administrator and grows tax-free until you decide to distribute to a charity. The annual admin fees vary but are usually 1.5% or less.
There is currently no time limit for when DAF funds must be dispersed. It’s entirely up to you when to dispense the money and how much to give to each charity. And it’s possible for the DAF to outlive you, the grantor, and to be guided by the next generation. There is, however, a movement afoot to require distribution of funds within a certain time (seven years is one proposal) or pay an excise tax on those funds. So, there may eventually be a timeframe for distributions, although it’s still likely to be years out.
Privacy. DAFs do not require the disclosure of disbursements, either to the public or even to the charity receiving the funds. The DAF administrator can issue a check to the charity you choose without naming you as the grantor.
Lots of charitable giving options. You can give to virtually any charity, as long as it is:
— An IRS-approved 501(c)3 public charity. But you can also make grants to certain public institutions, such as Seattle Public Schools, for a designated purpose.
You can be as specific as you want. You can name specific non-profits you want to support. Or you can allow the administrator to choose for you.
What You Can’t Do Through a DAF
Most of the no-no’s apply to things you do on your own behalf, or for your own benefit, and then ask the DAF to fund, including:
— Using DAF funds to pay for a pre-existing commitment or a pledge. This includes bidding on charitable auction items and paying for them later through the DAF.
— “Bifurcated” gifts. You as the donor cannot receive any benefit from making grants through the DAF – even relatively small things, like the cost of a dinner or of a membership, which you have to pay for separately, outside the DAF. While funds from your DAF can sponsor a table at a fundraiser, you cannot sit at that table or choose who sits there.
Organizations We’re Supporting
If you are wondering about where to direct your DAF distributions or other giving, below are some ideas. We’re currently matching employee contributions to the following organizations to address the impact of COVID-19: