Here are numerous reasons why donor-advised funds (DAFs) are the fastest growing charitable giving vehicle in the United States. They combine versatility, flexibility and simplicity when it comes to reporting to the Internal Revenue Service (IRS). Their appeal is widening too. Once confined largely to high net worth donors, their reach now extends to corporations of all sizes. Groundswell is playing a key part in empowering philanthropy using DAFs. Learn more about the five main benefits of donor-advised funds.
A DAF is a personal giving account with some big tax advantages and no minimum distribution requirements. That immediately puts it at an advantage compared to a private foundation, which must disburse a minimum of 5% annually. Giving to a DAF is straightforward, especially with Groundswell. You create a giving account and start making donations. There is no minimum annual contribution, and you don’t have to decide from the outset which charities you wish to support. The only restriction to be aware of is that the broker who manages the DAF retains control of how and when funds are disbursed. Donors can advise, but they do not make the final decision. Neither can you withdraw a donation once you’ve made it, since they are irrevocable.
With these features of DAFs in mind, what can businesses look forward to in real terms? It’s not just a question of paying lower tax, even if that is the most eye-catching advantage. DAFs can make a positive impact on the internal business culture too. Here are five areas that make DAFs hard to resist.
DAFs allow companies to look beyond short-term performance when it comes to charitable giving. That’s primarily because donations are immediately tax deductible at the time of giving, but the funds don’t have to be disbursed until later. In short, that means you can take advantage of tax deductions in a windfall year and advise on where funds should be disbursed when you’re ready. Instead of giving only in bumper years and having to rein in philanthropy in leaner ones, corporations can lock in the tax deduction in the former and release the funds throughout the latter. From a tax planning perspective, the reduction in liability is significant. Individuals can offset up to 60% of their adjusted gross income, although charitable donations cannot exceed 25% of taxable income.
If the prospect of handing over 15% to 20% in capital gains tax to the IRS every time you liquidate assets rankles, donor-advised funds offer a welcome solution. You don’t have to pay capital gains tax on assets transferred to a DAF, whether they are stocks, bonds or real estate. Moreover, you can transfer assets at the fair market value rather than the purchase price, provided you have held them for more than a year. For corporations who’ve seen their assets perform strongly in a bull market, the idea of giving up a substantial portion of the gains to the government without having any say in where the money goes can be unpalatable. Donating the assets to a DAF allows the business to release the tax deduction and put those assets toward a more clearly defined purpose.
Many nonprofits are restricted from accepting complex assets (i.e., other than cash) as donations if they want to stay on the right side of IRS 501(c)3 regulations. Donor-advised funds provide the mechanism, however, for businesses to donate real estate, private and public stocks, or inventory. On the giving side, corporations can fuel their account with a variety of assets and amalgamate a large number of individual donations into an easy-to-administer fund. Compared to private foundations in particular, the administrative burden is significantly lower.
Investments in donor-advised funds grow tax-free and you can donate mutual fund shares, trusts, private equity and hedge fund interests and even cryptocurrency. When it’s time to release the grants, you can unlock the appreciated value of the assets without deducting tax. Admittedly, that’s not always the approach some corporations take with their investments. Criticism is often leveled at DAFs as a means for institutional investors to “park” assets in funds and collect the upfront tax deduction without disbursing any grants. That’s “zombie philanthropy” in action, but Groundswell is geared toward moving grants as efficiently as possible to the nonprofits that desperately need support.
Donor-advised funds empower companies to align their charitable giving to their corporate goals. Instead of making smaller, less formal donations on an ad hoc, reactive basis, leadership can collaborate with employees on a long-term philanthropy structure:
DAFs provide a great way to define and improve company culture. A more engaged workforce leads to a more profitable and productive company, after all. You’ll also have a stronger case for attracting top talent if you can demonstrate a commitment to causes that resonate with your future employees and offer a stakeholder role as part of your financial wellness benefits.Employees can sit on the committees that set philanthropic goals and nominate causes to support. Whether the committee decides to support a single cause or a collection of charities linked to a global mission, a proactive approach gives clarity and consistency. It also makes it easier to deal with ongoing requests for charitable support during the financial year. While there is no obligation for a business to reveal the causes it supports through a DAF, it’s an opportunity for transparency and positive PR. List the nonprofit organizations the company supports in company reports and on the website, and show fundraisers how to apply for grants.
The philanthropy-as-a-service (PhaaS) model pioneered by Groundswell is giving fresh impetus to corporate giving. Not only do we allow your business to set up a giving account faster, we provide a better giving experience too:
You’ve seen the benefits. Now learn more about maximizing the ease and efficiency of your corporate giving, as well as boosting employee engagement, with Groundswell.
