The Ins and Outs of Being Philanthropic

Not unlike most people, I am sure that you have been solicited by multiple philanthropic organizations for your donations.  Often, when the doorbell or the phone rings, and we encounter a request for cash, we feel cornered but wish to be a good citizen and therefore donate some amount to a good cause. However, not unlike you, I feel uninformed as to who this person is; are they representing the organization, or even more so, is this organization an actual charity that is well run so that most of my philanthropic effort and outlay is used for its intended purpose. 

Many wealthy individuals and families have established private foundations so that they can keep control on the funds they use to support philanthropic endeavors.  Many of these are in the public eye and must disclose their information annually.  You may not feel that such an option exists for you but there is a vehicle you can use that will provide a similar level of control.  Donor Advised Funds (aka DAFs) have existed for quite some time and can be a great solution for those who have prioritized philanthropy in their financial planning.

It's easiest to describe DAFs through an example.  Let’s say you win a lottery whereby you are to receive $50mm in cash as a prize.  You’ve historically provided some portion of your income to philanthropic purposes and wish to do the same with a significant portion of the lottery proceeds, to the tune of $20mm.  You are well aware that by doing so, in the same year you are receiving this prize, you will deduct this donation, thereby reducing your income tax for the year.  However, you do not know where to donate this large sum of charitable granting in an effective manner and don’t want to make a hasty decision.

A DAF is an intermediary charitable organization where you may donate funds in the current year but can grant these funds to their final beneficiary i.e., operating charities, at another time in the future.  Also, they can serve as your due diligence representative as you will not be able to grant funds from the DAF unless the grantee is a recognized charity.  By advising fundraisers that you will be donating through your DAF, you can validate their request for a donation.

DAFs don’t have to be used solely for large income events.  They can be your charitable checking account, so that you can be financially efficient with your donations while granting as you see fit.  For example, donate 50% of your income annually and when a natural disaster happens a few years down the road, you can effectively give all your DAF balances to help the victims. 

Another benefit to a DAF is that they will accept (long term) appreciated securities.  When you donate such securities, you can avoid the capital gains tax while also receiving a deduction of the market value of the securities. This is true whether or not you use a DAF, however the process is made simpler when going through a DAF, then liquidating the securities in the DAF, and granting the cash to its intended beneficiary.  This is especially helpful when you feel that the security has peaked in value, but you don’t wish to realize the gains AND you are unsure as to which charity you wish to provide the funds. Below is an illustration of a donation of $500K of appreciated securities with embedded long-term capital gains (LTCG), assuming an investor is in the top marginal tax brackets.

Source: Ahara Advisors.

There are a few major financial institutions who have established a DAF.  Fidelity, Schwab and Vanguard are some of the largest. There are also faith-based DAFs such as the Jewish Communal Fund and the National Christian Fund. 

At Ahara Advisors we can assist you in establishing a DAF and help you determine not just how to donate, as there are several options (e.g., cash, highly appreciated securities, etc.), but also how to invest the donated assets.  There is no point in holding assets without receiving some rate of return, whether it is interest on fixed income securities, or market appreciation and dividends on stocks.