A Donor-Advised Fund’s Role in Charitable Investment Management

Wynn Shepard Professional Advisors

A Donor-Advised Fund’s Role in Charitable Investment Management

According to Giving USA, charitable giving in the U.S. amounted to a record-breaking $471.44 billion in 2020. But, donors are not using cash or their checkbooks alone to make their donations to charities. Instead, the statistics show donors are supporting nonprofit organizations via grants from their donor-advised funds.

National Philanthropic Trust’s 14th annual 2020 Donor-Advised Fund Report published statistics supporting American donors growing reliance on donor-advised funds to not only give, but also as a tax strategy and a way to solidify a charitable legacy in their or their family’s name. The latest Donor-Advised Fund Report revealed:

  • The value of grants from donor-advised fund accounts to qualified charities totaled $27.37 billion in 2019, a 15.4% increase from $23.72 billion in 2018. Since 2010, the value of grants to qualified charities from funds has increased 198.8%.
  • Contributions to fund accounts totaled $38.81 billion, a 7.5% increase from 2018.
  • Charitable assets in all donor-advised fund accounts totaled $141.95 billion, a 16.2% increase from 2018. The continued growth of charitable assets under management reflects increases in the number of funds, contributions from donors and investment gains.
  • The number of donor-advised fund accounts in the U.S. totaled 873,228, a 19.4% increase compared to 731,607 in 2018. In the past 10 years, the number of fund accounts grew almost 300%.

Helping Your Clients Maximize Charitable Donations

Despite the obvious growing popularity of donor-advised funds, you might find your clients are largely unaware of how they work and the social and personal benefits of using them. As your clients’ trusted financial professional, you are in the best position to educate them, while retaining the option of managing their charitable investments, just as you do other investment accounts.

Explain to your clients that a donor-advised fund is a tax-deductible financial account from which they can donate to charitable 501(c)(3) organizations, rather than donating from their personal accounts. By streamlining donations to multiple charities from a fund, clients have one year-end statement for contributions in and out of the fund compared to multiple tax receipts from each organization to which they contributed for tax purposes. The contributions and interest in the donor-advised fund can grow tax-free, increasing the amount clients have to support causes that matter most to them.

Should a client elect to open a donor-advised fund, there are various ways to fund it. Be it a one-time deposit or recurring donations, fund contributions can have favorable tax implications for your client, as the total year’s contribution amount is tax-deductible for that year’s tax return. Clients may also make a donation of appreciated stock or other assets, which can decrease or avoid capital gains tax.

Learn about the tax strategy behind bunching donations in donor-advised funds.

Charitable Investment Management for Retired Clients

Your clients’ retirement accounts can also be vehicles for tax-efficient charitable giving. Whether they have a tax-deferred IRA or a 401(k), here are a few strategies you may consider and recommend to them:

  • Naming their donor-advised funds as the beneficiaries of their retirement account at death.
    A retirement account can pass to a donor-advised fund tax-free because the fund is administered by Greater Horizons, a public charity. This leaves more assets in your clients’ funds to support their favorite causes and charities.
  • Naming a charitable remainder trust as the beneficiary of their retirement accounts to stretch the distribution over time.
    The SECURE Act requires most non-spouse retirement account beneficiaries to withdraw all assets of an inherited account within 10 years. This means your clients’ beneficiaries can no longer stretch the payouts from a retirement account across the beneficiaries’ life expectancies. However, if the retirement account is payable to a charitable remainder trust, the trust payments can be made to one or more individual beneficiaries over their lifetimes or for a term of years (up to 20 years), with the remainder interest passing to charity. This defers the income taxes the beneficiaries would have paid if they received the retirement account directly. A donor-advised fund at Greater Horizons may be named as the remainder beneficiary of a charitable remainder trust. Greater Horizons can also serve as the trustee of the trust, if needed.
  • Pairing a Roth conversion with a donor-advised fund donation.
    Your clients can convert a traditional IRA to a Roth IRA without penalty, if the money is moved from the traditional IRA to the Roth IRA within 60 days. However, that transfer is a taxable event. If cash or other assets are donated to a donor-advised fund in the same year, your clients’ tax liability may be reduced.
  • Making a qualified charitable distribution (QCD) from your clients’ IRAs during their lifetime. (For those age 70 ½ or older.)
    Your clients can distribute up to $100,000 annually from their IRAs directly to their favorite charities without recognizing income on those distributions. If they want to stagger their donations to a single charity over multiple years, rather than making the donation in one lump sum, Greater Horizons can help create a designated fund for that charity. Your clients can also use a QCD to establish and contribute to a scholarship fund.

Greater Horizons’ philanthropic advisors work with financial professionals to help their clients maximize and organize their charitable giving. We make giving easy and will work with you to develop a solution to meet your clients’ needs.

Contact us to learn more.


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