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January 20, 2023 / The Merrill Anderson Company
Charitable Giving; A donor-advised fund offers tax benefits

Charitable Giving; A donor-advised fund offers tax benefits

Taxpayers generally welcomed the rough doubling of the standard deduction in the 2017 tax reform legislation. One group that was worried about unintended side effects of the change was the nonprofit sector. The larger standard deduction coupled with the cap on the deduction for state and local taxes meant that most taxpayers would no longer get any tax benefit for their charitable gifts.

animation of people placing money into a donation boxThe worries turned out to be unfounded, as total charitable giving has not declined. Most people give to charity for philanthropic reasons, not to get tax benefits. However, there was a related side effect, and that has been a boom in donor-advised funds.

The idea behind a donor-advised fund is that money is permanently set aside for charity in the fund, but the charity may not yet be specified. A full tax deduction may be allowed in the year of the contribution to the fund, while the disbursements to charity take place over the subsequent years. Note that the advice that the donor makes to the fund about the charitable beneficiary in subsequent years is not binding, but the fund will typically follow the wishes of the donor.

The tax strategy that this suggests is to bunch charitable deductions. One year, the taxpayer doubles up on charitable gifts and itemizes deductions; the next year, no such gifts are made, and the standard deduction is taken instead. When the large gift is made to a donor-advised fund, the receipt of the money by the charity is deferred.

A recent report from the National Philanthropic Trust documents the success of donor-advised funds (https://www.nptrust.org/reports/daf-report/).  Key metrics include:

  • The number of accounts in donor-advised funds rose from 1,007,745 in 2020 to 1,285,801 in 2021, an increase of 27.6%

 

  • Assets held in these funds grew 39.5% from 2020 to 2021, from $167 billion to $234 billion.

 

  • Total transfers to charities by the funds in 2021 were $45.74 billion, a 27.3% payout rate. This was a 12.7% increase over the 2020 payout rate.

  • Private foundations hold some $1.3 trillion in assets, about five times larger than the donor-advised funds. Yet the total grants by private foundations came to only $96.27 billion, about double the total grants from the donor-advised funds. (Private foundations are only required to distribute 5% of their assets annually to charity).

The report concluded with a prediction of slower growth for donor-advised funds, in part as a response to financial market volatility in 2022.

 

© 2022 M.A. Co.  All rights reserved

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