family edits donor advised fund

May 11, 2020

Wealth Planning Opportunities During a Pandemic: Donor-Advised Funds

The coronavirus pandemic has created suffering for communities across the globe, both from a health standpoint and from an economic one.

But while the focus has often been on the heroics of first responders and essential workers, or the tragic loss of life and livelihood for so many, nonprofits have been standing firm throughout the crisis, working tirelessly to ensure the survival of those in need.

Just a few of the services nonprofits are providing at this time include:

  • help for low-income households and homeless individuals.

  • support to essential workers who must make sure their families are safe at home while they work late hours to keep others alive.

  • aid to food banks now battered by a simultaneous drop in donations and the rapid increase in need.

While interest has spiked in helping community organizations meet the needs of those impacted by COVID-19, many people are wondering how they can make the biggest positive impact, most immediately.

Setting up a Donor-Advised Fund (DAF) is an option to consider. A DAF is a charitable-giving vehicle that allows you to make a charitable contribution, receive an immediate income tax deduction and then recommend grants to various organizations over time.

“This is the time when giving to charity is not just being charitable, it's necessary as a way to help organizations that provide for those in need," said Alma Banuelos, head of Trust and Estate Services for City National Bank.

Below, you'll find a breakdown of the benefits of Donor-Advised Funds.

The Value of Donor-Advised Funds in Difficult Times

Charitable giving to a variety of organizations is valuable at any time.

However, nonprofits are now suffering some of the same repercussions of the pandemic as for-profit businesses. As many rely on event fundraising and membership fees to maintain their programs and services, social distancing measures are hurting those efforts.

If a DAF is part of your wealth plan, and you are interested in distributing more of your balance to support communities during this time, you might consider this list of nonprofits that are actively serving communities affected by COVID-19.

Need to discuss your DAF or wealth plan with an advisor or wish to find one? Get in touch with a City National advisor today.

Benefits of Donor-Advised Funds: Flexibility

Donor-Advised Funds have grown in popularity in recent years as a charitable giving tool mainly because of their flexibility.

“You can contribute to the DAF as frequently as you would like to and then recommend grants to charities whenever you feel it is worthwhile, as it is today during the pandemic," said Banuelos. “The grants can be made as frequently or infrequently as you want."

This type of flexibility for contributions can be helpful in national and international times of crisis, when you want to support a nonprofit but may not have the ability to donate as you normally would.

If you're interested in donating to nonprofits serving those impacted by COVID-19, for example, you can recommend donations of some of the funds that may have accumulated in your DAF over the years.

Furthermore, you're afforded privacy. Donations made through a DAF can be given anonymously from the DAF to the charity, said Banuelos.

“The DAF manager fully vets all nominated charities for you. This ensures they are legitimate and properly using the funds as you intended," she said.

Benefits of Donor-Advised Funds: Taxes

In addition to this flexibility, DAFs offer numerous tax benefits to the donor, such as:

  • Income tax. Contributions to a DAF qualify for an income tax charitable deduction for the year in which you contribute to the DAF. Concerned about your unused deductions? There is a five-year carry-forward period for those.

  • Alternative Minimum Tax (AMT). Your contribution to a DAF may lessen the impact of AMT.

  • Estate tax. Balances in the DAF are not included in your estate for estate tax purposes.

  • Tax-Free Growth. The DAF investments can appreciate tax-free.

  • Capital Gains Tax. Gift of appreciated or illiquid assets, including real estate, to a DAF do not incur capital gains tax.

In 2018, U.S. charitable giving of all types amounted to nearly $428 billion nationally, 68 percent of which was given by individuals, according to the 2019 DAF Report by the National Philanthropic Trust, a public charity that sponsors a DAF.

Charitable donations from DAFs in 2018 alone totaled over $23 billion.

More Reasons to Contribute to A Donor-Advised Fund

Instead of offering a direct donation to a specific charity, you can establish a DAF to streamline your contributions to as many causes as you like through one system.

“If you decide to establish a DAF account, you can make an irrevocable contribution to the DAF of your personal assets, including cash, stock, other securities or real estate," said Banuelos. “You receive an income tax deduction in the year the contribution is made on your federal income tax return."

Because contributions to a DAF are considered gifts to public charities, donors then can take a deduction of up to 60 percent of their adjusted gross income for a cash gift.

You can take up to 30 percent of your adjusted gross income for the gift of a capital asset in the year the contribution was made.

Any unused portion of the deduction is carried forward for up to five years, Banuelos confirmed.

Since the 2017 Tax and Jobs Act increased the standard deduction for federal income taxes, some individuals have opted to “bunch" their charitable giving by doubling or tripling their donations in one year and skipping the next to reach the threshold to itemize their deductions.

A DAF provides a way to maximize deductions in one year while allowing donors to spread out grants over time.

“Your contribution is placed in a DAF account where it can be invested and grown," said Banuelos. “To make donations, you can recommend grants to the DAF manager at any time."

Your Investment Options

Many DAFs offer a variety of investment options for your money.

For instance, social impact investing is a popular option, according to Consumer Reports. This means your money can be invested in companies that are not only environmentally sensitive but also socially responsible.

Then, regardless of your investment choice, your DAF becomes part of your estate and wealth planning. This allows you to maintain control of your contributions and name successor advisors such as your children.

Since DAFs allow you to make contributions to the fund as well as grants to nonprofits over time, they can be a good tool for managing long-term philanthropic efforts in your family as well as a short-term tool for immediate impact.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.