Originally published by North Carolina Lawyer Magazine, November, 2021.
by Woody Connette
Charitable donations are the lifeblood of colleges, faith communities and nonprofits. Imagine the human suffering in our communities without homeless shelters, food banks and crisis assistance nonprofits. Community symphonies and arts programs enrich us all. Land conservancy and environmental groups assure a greener world for generations to come. Lawyers know better than anyone the critical need for legal services and access to justice for those who cannot afford our fees. Indeed, philanthropy is like oxygen, and in various ways we all depend upon its life-giving properties.
Americans lead the world with the level of their charitable giving. In 2020, they gave $471 billion to charity.[i] As a group, lawyers are known for their high levels of philanthropy. Charities benefit from our largesse, and our profession benefits from our community support and engagement.
Historically, most of us have supported charities by writing checks and keeping a list of donations to claim as a tax deduction at year-end. While tax deductions have given us a financial incentive to be charitable in the past, changes in the tax code have made it more difficult for middle income taxpayers to enjoy this benefit. The 2017 code revisions nearly doubled the standard deduction. In 2021, the standard deduction is $12,550 for single filers and $25,100 for joint filers. Another big change was the imposition of a $10,000 cap on deductibility of property taxes, state and local income and sales taxes.
As a result, most taxpayers are better off claiming the standard deduction. This is especially true if you have no home mortgage interest deduction to claim. Even in the top quintile of tax filers, 79.2% used the standard deduction in 2019, up from 36.5% in 2016, based on Tax Policy Center analysis.[ii] For most of us today, claiming a charitable deduction has little or no value.
This is where a Donor Advised Fund (“DAF”) can help you. DAFs are giving vehicles established by individual donors at a community foundation (see North Carolina Community Foundations here) or another public charity. In simple terms, you create a DAF by making a charitable contribution to a foundation that holds the funds in a separately identifiable account. You then can advise the foundation on the amounts that you would like to distribute from that account to virtually any IRS-qualified public charity. The foundation administers the fund and issues checks to qualified charities in response to requests by the donor. Internally, the foundation holding your funds can invest them for tax-free growth.
You can claim a charitable deduction for the full amount of the initial donation into the DAF during the tax year in which it is made. After that, there is no limit on how long the funds can be held by the foundation.[iii]
It’s no wonder that DAFs are one of the fastest growing forms of philanthropy. According to the National Philanthropic Trust’s “2019 Donor-Advised Fund Report,” there were 728,563 DAFs in 2018, which represents a 200%+ increase as compared to the 241,507 DAFs in 2014.[iv]
Creating a DAF gives you the opportunity to make an initial, relatively large donation to the fund in year one, and then use those funds to support your preferred charities over the course of the following two, three or more years. Imagine this: in a typical year, you make about $10,000 in combined donations to the North Carolina Bar Foundation, your church or synagogue, your college and law school alma maters, and a few local charities. At that giving level, you likely will have little or no benefit from itemizing deductions on your tax return.
If you make an initial donation of $30,000 to your DAF, and then use those funds to make your regular charitable contributions during the ensuing three years, then you can itemize your deductions in year one, claiming a charitable deduction of $30,000. In years two and three, you take the standard deduction. This “bunching” strategy could help you reduce your overall tax obligation.
There is second way in which a DAF can help you leverage your philanthropy, by using appreciated stock to make your initial contribution to the DAF. Suppose you had the foresight to pay $3,000 for a tech stock that now is worth $30,000. When you donate that stock through your DAF, then you can claim the $30,000 charitable deduction, even though your initial investment was only $3,000. Best of all, you pay no capital gains tax. Indeed, this benefit from donating appreciated stock may be far greater than the tax value of the charitable deduction.[v]
A final benefit of DAFs has little to do with money. Think of it as an opportunity for personal growth. In creating a DAF, you naturally will think more deeply about your own philanthropy: what are the organizations and causes that you care most about? Doug Benson, General Counsel and Senior Vice President of the Foundation for the Carolinas, appreciates the personal value of creating a DAF. “Individuals who create donor advised funds often begin to think about their charitable giving in new ways. The donor advised fund creates a level of formality which can lead to meaningful conversations about their philanthropic goals as well as how they want to involve family in their giving.”
Creating a DAF is simple. North Carolina enjoys a vibrant network of community foundations. All of them welcome DAFs and are happy to help you set one up. Fidelity, Vanguard, and a host of investment managers also offer options for creating DAFs. To explore DAFs more carefully, read Doug Benson and Whitney Field’s excellent article, “Selecting the Right Philanthropic Vehicle: Private Foundations vs. Donor Advised Funds,” published in The Will & The Way, by the NCBA Estate Planning & Fiduciary Law Section. Of course, you should consult your own tax and financial advisors. Tell them you read this article that was written by a trial lawyer, and you’re skeptical. Ask them if a DAF could really be all that great for you. I am betting the answer will be yes.
[i] Chronicle of Philanthropy, June 21, 2021. https://www.philanthropy.com/article/americans-gave-a-record-471-billion-to-charity-in-2020-amid-concerns-about-the-coronavirus-pandemic-job-losses-and-racial-justice
[iii] A criticism of DAFs is that charitable funds can be locked up indefinitely. The policy issues surrounding DAFs is beyond the scope of this article.
[iv] Doug Benson and Whitney Field, “Selecting the Right Philanthropic Vehicle: Private Foundations vs. Donor Advised Funds,” published in The Will & The Way, the newsletter of the NCBA Estate Planning & Fiduciary Law Section, Vol 40, No. 1, September 2020. https://www.fftc.org/sites/default/files/2020-09/The_Will_The_Way_newsletter.pdf
[v] The North Carolina Bar Foundation and other larger charities are set up to accept donations of appreciated stock, but most smaller charities, like community food banks and homeless shelters, struggle with these asset transfers.