Total charitable impact

 

Many donors diversify their charitable portfolio among several giving tools

November 6, 2017

 

Similar to a diversified investment portfolio, many donors allocate their charitable dollars among a mix of giving tools. A diversified approach to giving can optimize tax benefits and create more strategic philanthropy, which is good news for the nonprofits that depend on their support.

 

The total impact on charitable giving as a result of donors’ use of multiple tools is not formally tracked, but it’s likely to lead to higher giving in the aggregate. For instance, while contributions to donor-advised funds (DAFs) increased 11.4% to a record high $22.26 billion¹ in 2015, the popularity of the tool doesn’t preclude money from getting to charities in other ways.

 

Indeed, while accounts at donor-advised fund Vanguard Charitable grant regularly—85% to 90% grant every three years, with the majority of donors granting at least 5% of their balance per year—56% of Vanguard Charitable donors report that they use their account for only the majority of their giving. This suggests that they’re also granting via other options.
 

Direct giving… and what else?
Nearly 87%² of high net worth donors give cash (usually through checks or debit and credit card transactions) directly to charities, even if they use other giving tools. But direct cash giving requires the donor to obtain a written substantiation letter from each charity for tax purposes and has limited tax benefits compared to donating other types of assets.

 

While some donors use just one giving tool, other donors often find that using multiple giving options enables them to implement a philanthropic strategy that addresses different goals, contribution and investment types, distribution and legacy options, and cost.

 

Here’s a look at some of the most commonly used giving tools.

 

Private foundation, donor-advised fund… or both
Traditionally, high net worth individuals tended to set up private foundations—independent charitable organizations with governing legal documents and a governing body with complete control over investment and grant-making decisions—for their charitable giving. Private foundations enable donors to make charitable gifts for a specific mission, build a permanent legacy, keep control in the family, and of course, achieve tax benefits. Because private foundations are subject to strict regulations, including a required 5% annual distribution of net investment assets, they are generally expensive to create and maintain. And because of public filing requirements, it is difficult to use a private foundation for anonymous giving. When assets are contributed to a private foundation, donors can deduct up to 30% of AGI for cash gifts and 20% for securities held more than one year.
 

Vanguard Charitable is seeing a trend in donors using both a donor-advised fund and a private foundation.

 

DAFs are not a new giving tool but have recently exploded in growth. Donors contribute assets to a DAF and take an immediate tax deduction. The DAF sponsoring organization becomes the legal owner of the funds, but the donor retains the right to recommend the investment options for the assets, which can grow tax-free and thus create a more substantial charitable impact over time. Donors may also make recommendations regarding grants made from the DAF. DAFs provide many charitable and administrative services for donors, including a single written substantiation of charitable contributions for tax purposes, tools for performing due diligence on charities, and the ability to process contributions of appreciated securities and complex assets. National DAFs are low cost and cause neutral, meaning donors can recommend grants to any charity that meets IRS requirements. DAF accounts are generally not subject to an annual mandatory distribution, although many are required to make at least one grant every few years. When assets are contributed to a DAF, donors can deduct up to 50% of their adjusted gross income (AGI) for cash and 30% for securities held more than one year.

 

With greater recognition of DAFs, many private foundation managers and donors are shifting how they use the vehicle.

 

“We’re seeing a trend in many donors using a DAF in combination with their foundation so that they can recommend anonymous grants, invest certain assets differently, contribute different types of assets (for instance, it’s more beneficial tax-wise to contribute appreciated securities to a DAF than a private foundation), reduce the total cost of giving, and have the flexibility to grant outside the foundation’s mission. Others are choosing to close their private foundations and transfer all the assets to a DAF,” said Ann Gill, chief philanthropic officer for Vanguard Charitable.

 

Charitable trusts and annuities as cash flow and estate planning tools
Many donors include trusts in their charitable portfolios to obtain an income stream and estate tax benefits.

 

With a charitable remainder trust, a donor transfers assets to a trust and receives an annual income stream for a select individual. At the end of the trust’s lifetime, the remaining funds are transferred to a charity.

 

With a charitable lead trust, the order is reversed. Once assets are transferred to a trust, a chosen charity receives an annual gift for a period of time, while a family member or other beneficiary assumes the remainder in the future.

 

A charitable gift annuity is a contract established with a charity that allows donors to transfer assets to the charity in return for lifetime income. Upon the donor’s death, the charity keeps the remainder of the gift.

 

Choosing your portfolio of giving tools
For donors looking to expand their charitable portfolio with giving tools that best support their philanthropic preferences and giving goals, Vanguard Charitable suggests assessing six key factors: cost, distribution to charity, control or level of input, legacy options, tax effectiveness, and recognition vs anonymity.

 

Consult a tax advisor about the tax features associated with each tool.

 

 


1: Giving USA 2017, citing 2016 Donor-Advised Fund Report, National Philanthropic Trust

2: US Trust Study of High Net Worth Philanthropy