Tax Breaks Now, Charitable Gifts Later: What to Know About Donor-Advised Funds

What are the specific steps needed to make a DAF donation?

It's very easy. The client contributes [moves to their DAF account] cash or noncash assets, like publicly traded stocks or real estate. We liquidate those assets at the time they're donated and then immediately deposit the proceeds into the donor's account.

The donor receives a tax deduction for the value of whatever assets they choose to contribute.

Is there any downside?

The contribution is an immediate, irrevocable gift to a charity [which they may designate later]. They relinquish control of the assets, but they can make recommendations for how they're invested, and they ultimately, [identify] the charities for those grants.

Is it easier if the client already has a Schwab investment account?

The DAF account sits right next to their other Schwab accounts. So all the donor has to do is click a couple of buttons and pull the assets from their existing Schwab account. Then they indicate where the assets are to be directed, and the grant is processed pretty much immediately.

Of course, the donor's brokerage account can be anywhere they prefer, not necessarily at Schwab.

Tell me more about investing the donated assets.

Once the assets have been liquidated and the proceeds deposited into the account, they're invested in a variety of different ways for potential growth.

The investments can be managed by Schwab Charitable, but we also work with over 3,500 advisors who manage the accounts on a donor's behalf.

[Alternatively], the advisor who has a relationship with the client can manage the account. They frequently tell their clients, "We can help you mitigate tax exposure and maximize your philanthropic impact with a donor-advised fund."

They'll review it with them as a potential option. Then they can open the account and manage it.

What are Schwab Charitable's relationships with the charities?

We have a database of about 2 million 501(c)(3) charities that are all in good standing with the IRS.

We help them with their fundraising and development to make sure they're choosing tools to promote the fact that they happily accept gifts from donor-advised funds in addition to cash, checks, stocks and so forth.

We provide the charities with resources, best practices, [and] a widget they can put on their website that takes people [where they can] make a donor-advised fund [grant].

Please contrast a DAF with a private foundation.

There are certain things donors prefer to do with a private foundation that they can't necessarily do with DAF and vice versa. So, frequently, people have both.

There's generally more latitude and flexibility with a private foundation. But they tend to be more expensive to administer: There's overhead, salaries and a variety of other costs that don't exist for DAFs.

Foundations typically have staff that are family members managing the foundation. With a DAF, there isn't any such opportunity.

DAF donors can't do anything that would afford the donor direct benefit. For instance, through a private foundation, donors can give [assets] for a child's or grandchild's scholarship. They can't do that with a DAF.

Also, there are tax deductibility limits that differ between a donor-advised fund [up to 60% of adjusted gross income] and a private foundation.

Any more differences?

DAFs afford donors the opportunity to give anonymously, whereas, with a private foundation, that information is available publicly.

A very small amount — about 4% — of our donors choose to give on an anonymous basis.

It's not so much to avoid solicitations, but they don't want recognition for their gifts. They don't want to be anything more than generous with their philanthropic resources.

So they choose by design to give in a manner that maintains their anonymity but still allows them to be incredibly generous.

In addition to your DAF platform, do you liaise with the nonprofit sector?

We work with a lot of leaders there to develop or source educational tools and resources that we can offer to our financial advisors and their clients so they're as informed about how we manage philanthropy as much as possible.

For example, we partnered extensively with Stanford University and co-hosted a series of podcasts and webinars with them and other leaders in the philanthropic sector about areas particularly relevant to donors and financial advisors.

One webinar was about how DAFs can be added and be helpful to the development efforts of St. Jude's fundraising arm.

All in all, we're trying to bring more relevant information to our donors and financial advisors to help them embrace the right approach to philanthropy.

Pictured: Fred Kaynor