Charitable Giving and Donor Advised Funds: Doing Good, Doing Smart

by: Smith and Howard Wealth Management

Many of our clients tell us that charitable giving is a fundamental part of their lives, one that is a joy and an honor.  Their charitable giving approaches range from causes as simple as donating loose change to the Cub Scout who knocks at the door to funding high-dollar charitable trusts.  Our relationship-centered approach to financial advising allows Smith and Howard Wealth Management (“SHWM”) to understand each client’s unique approach to giving and help them give in a financially-savvy manner.  With the first client meeting and regularly throughout the relationship, our advisors ask about causes they care about and their giving goals.  We use a variety of financial vehicles and strategies to help clients get the most out of their charitable dollar, including using Donor Advised Funds to make giving easy and part of an overall financial plan.

An Introduction to Our Approach to Charitable Giving

Working closely with our tax colleagues at Smith and Howard, SHWM advisors help clients evaluate a range of giving options.  For example, while cash is the most common way to give, donating appreciated securities can be wiser.  Typically the charity receiving the donated securities can sell the stock tax-free, allowing the organization to profit while the client avoids the capital gains tax liability that would attach were the client to sell the stock.  Likewise, timing matters and giving shouldn’t always follow the calendar.  Instead, we recommend making donations at strategic times, such as after a stock has risen to a high valuation.  This can maximize both the deduction and the charitable impact.

Various financial vehicles can also be part of a charitable plan.  Recently, a client had a large, one-time capital gain.  We knew he was a strong supporter of his alma mater and also that he was looking to ensure he had a steady source of income during retirement.  We set up a Charitable Remainder Trust (“CRT”) and he made a large donation to the trust, getting the full tax benefit of the donation immediately.  Per the terms of the CRT, the client will receive interest income from the trust for 20 years and then the remaining principal will be donated to the school.

The Donor Advised Fund: An Overview

Another useful giving tool is the Donor Advised Fund (“DAF”).  DAFs are becoming increasingly popular and with good reason.  A DAF allows the donor to front-load giving, putting a lump sum into the Fund at once and distributing it over time to one or multiple charitable organizations.  DAFs can accept a wide variety of assets including cash, stocks and all or part of an IRA.  Other assets like real estate and tangible personal property are accepted on a case-by-case basis.  The donation must be irrevocable and the donor must relinquish control over the assets which become property of the DAF.  Money in the DAF is invested under the direction of the client or appointed financial advisor.  When the individual wishes to give to a qualified organization, he recommends the donation to the DAF.

Benefits and Drawbacks of DAFs

Tax-related benefits are perhaps the most attractive features of DAFs, allowing people to separate giving decisions from tax decisions.  From a tax standpoint, donations are complete when the asset is transferred to the DAF and valued for tax purposes at that time.  Donors benefit from their deduction immediately, key when the donor has a large gain in a given year.  DAFs also reduce paperwork, especially for donors who support multiple charities including smaller dollar donations.  The tax side is complete in one transaction and the DAF maintains records on donations.

The tax-related benefits are numerous, but there are other benefits to DAFs.  Recently, a new client expressed a desire to make anonymous donations, a feat more difficult than many would imagine.  We helped her accomplish the goal easily via a DAF since the Fund, not the individual, is the listed donor.  DAFs can also help an individual create a giving legacy by designating future beneficiaries and/or successors who will manage the Fund after the original donor’s death.  This leads to another reason our clients like DAFs: they are a great tool for introducing children to charitable giving.  Our clients often involve their children in picking charities to support, allowing parents to teach their children about the family’s commitment to charity and providing a simple introduction to tax matters and general financial management.  DAFs also provide ease of operation with online portals making it easy to add to, manage, and give DAF assets.

There are, of course, limitations to any financial vehicle.  A transfer of assets to a DAF is an irrevocable gift and the donor cannot retrieve the assets at a later date for personal use.  Also, different DAFs have different rules about the charities that can receive Fund donation.  Most DAFs only support domestic charities and only allow donations to recognized 501(c)(3) charities, a rule that means donations cannot go towards political groups.  Additionally, the donor cannot receive any benefit from the Fund’s donation.  For example, a DAF cannot be used to attend an art show gala or to purchase seats at a charity fundraiser.

Choosing a DAF: The Schwab Charitable Fund and Other Options

SHWM works with numerous fund providers.  For example, we had a client who was very involved in Cobb County and therefore we helped her set up an account with the Cobb Community Foundation.  Other clients prefer the Community Foundation for Greater Atlanta or other local foundations.

When clients do not express other preferences, we may advise using the Schwab Charitable Fund.  Since Schwab is the custodian of our client’s investment assets, it is particularly simple to become involved in their DAF.  Schwab’s DAF has many other benefits.  Donors are allowed to open an account with as little as $5,000 while some other fund providers have a $25,000 minimum.  We have seen clients take advantage of this low minimum to establish a fund and educate an older child by allowing her to direct a distinct account.  The Schwab DAF allows donors to recommend grants of as little as $50 versus a $250 minimum with some other providers and grants can be sent to any certified US public charity instead of limiting grants to a set list of recipients.

A Shared Commitment to Giving

Giving is important to our clients and important to us.  As a firm and individually, we support several charities and nonprofits, including the Atlanta Community Food Bank and the Shepherd Center, a rehabilitation hospital specializing in spinal cord and brain injuries.  Our team members are often personally involved in service to nonprofits around Metro Atlanta.

Most of our clients give because they believe in giving, pure and simple, and we are honored to help them fulfill their charitable inclinations.  We strive to make giving convenient and to ensure clients receive any and all financial benefits associated with giving, even when those benefits are not the primary motivation for giving.  Charitable Donor Funds, including the Schwab Charitable Fund, are one tool for achieving these ends.  As we say, “Giving is good.  Smart giving is great.”

For more information, contact Michael Mueller here.