Donor Advised Fund Overview

Overview – What is a Donor Advised Fund?

A Donor Advised Fund is, very simply, a charitable entity that pools separate accounts made up of distinct charitable contributions from donors. DAFs provide upfront tax benefits for contributions from donors and the flexibility for donors to manage the contributed assets themselves or with the help of an advisor. DAFs also allow donors to make grants to the charities of their choice from the DAF whenever they would like, in any amount and either directly or anonymously. DAFs are offered by most large asset managers and also by many community foundations. Resonant Capital Advisors has worked with both Charles Schwab and Fidelity on client DAFs. Both firms have very straightforward and informative websites that explain the structure and benefits of DAFs:

Fidelity Charitable: www.fidelitycharitable.org
Schwab Charitable: www.schwabcharitable.org

Structure and General Benefits

Most simply, the DAF allows for upfront tax deductions, subject to adjusted gross income (AGI) limits, for the full amount of contributions (at fair market value) in the year the contribution is made. However, grants to charities the donor wants to support from the DAF may be spread out over the life of the donor, with the assets contributed by the donor appreciating free of tax. Thus the DAF is an effective estate and tax-planning tool with built-in leverage for charitable intent due to the ability to manage and grow the assets during the life of the donor, enhancing charitable effect.

Fidelity’s explanation is very simple and so we borrow it here. After setting up their DAF donors:

1. Give – make a tax deductible contribution (irrevocable) of $5,000 or more:
   1. Fidelity (or Schwab) Charitable can accept contributions of cash, appreciated marketable securities, and even complex assets like privately-held stock or real estate. Complex asset contributions require more work but Fidelity is very adept at handling these types of contributions.
2. Grow – invest the contributed funds using either an investment advisor (contributions of $250,000 or more) or Fidelity or Schwab’s model portfolios (<$250,000).
3. Grant – recommend the charities the donor would like to support, with the ability to be recognized or remain anonymous.

There are multiple more-specific benefits for clients using Donor Advised Funds. They include:

Tax Benefits

These accrue at multiple levels:

1. Upfront tax deduction for the full amount (fair market value) of the contribution to the DAF in the tax year the contribution is made;
2. If appreciated assets (marketable securities, privately-held stock, real estate) are contributed, capital gains taxation is avoided as these securities are sold after contribution to the DAF, which is a tax-exempt entity.
3. Contributions are irrevocable and thus out of the donor’s estate, avoiding estate taxation.
4. There is no restriction on making continued contributions to the DAF once set up. So the DAF can be used as a tax-planning tool as well as a charitable vehicle. DAFs are especially effective in years when a donor expects high income and/or capital gains taxation levels. Those who might find the most benefit from utilizing a DAF have tax situations that expose them to:
   • High marginal income and capital gains tax rates;
     2018 Update: the Tax Cut & Jobs Act of 2017 broadly cut tax rates but also made meaningful changes to the rules for deductions and the Alternative Minimum Tax (AMT)
     
   • The Net Investment Income Tax, i.e. the 3.8% surcharge the Affordable Care Act will impose on all investment income for individuals with AGI over $200,000 and couples over $250,00;
     
   • The Personal Exemption Phaseout (PEP) and Pease limit on itemized deductions for single filers with AGI over $250,000 and couples over $300,000.
     2018 Update: the Tax Cut & Jobs Act of 2017 eliminated the Pease limit on itemized deductions.
     
   • The additional .9% Medicare tax on wages for individuals with AGI over $200,000 and couples over $250,000.

Charitable Benefits

• Donors may think of the DAF as their pre-funded “Charity Checkbook” – they must distribute at least 5% of the account per year to qualified charities per the IRS rules, but other than that they can grant as much or as little as they would like annually to as many or as few charities as they choose.
• Fidelity and Schwab both allow donors to pre-designate the charities of their choice during account setup, along with the amounts or percentages they would like to have distributed to those charities. But donors can always make one-off gifts or add designated charities during the life of their donor advised fund.
• All grant-making and distributions can be set up automatically or made online by donors through Fidelity’s website.

Investment Benefits

As noted above, donors who maintain Charitable Account balances of over $250,000 may use a Registered Investment Advisor like Resonant to individually manage their accounts. If under $250,000, Fidelity and Schwab both have a range of investment choices for donors:

1. Asset Allocation pools built from each firm’s models and using their internal mutual funds;
2. Index & Single Asset Class Pools for donors who want to build a custom strategy for their accounts;

These options are well-detailed by Schwab and Fidelity on their websites:

1. Fidelity: http://fidelitycharitable.org/giving-account/features/investments.shtml
2. Schwab: http://www.schwabcharitable.org/public/charitable/donor_advised_funds/invest.

Even with contributions below $250,000, we at Resonant will be able to see, advise and report on client DAF investment options and performance.

Donor Advised Funds are an excellent way to satisfy charitable intent while also maximizing tax and investment benefits. Both Fidelity and Schwab’s websites are extremely well-designed, and we encourage clients who are interested in Donor Advised Funds to spend some time reviewing the material there. We hope you have found this helpful. Please note the disclosure below as we want to be clear that neither we individually nor Resonant Capital Advisors LLC as a firm provide tax advice. We encourage you to speak with your CPA for specific information on your individual tax situation and whether a DAF or other charitable gifting strategy is right for you. As always, we at Resonant are happy to work with you and your other advisors in these circumstances.