Ronald McDonald House Charities of San Diego

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Communicating the Benefits of a Donor Advised Fund to Your Clients

Matt Ryan, CFA, CFP®—Financial Advisor at Creative Capital Management Investments (CCMI)

“How do I make charitable contributions more tax efficient?”—This is a question we hear often as financial professionals and one of the answers to this question is to utilize a Donor Advised Fund (DAF). Directing grants from a Donor Advised Fund is one of the many ways to give to a charitable organization, such as the San Diego Ronald McDonald House. Given the importance of this type of fund and its multiple tax benefits, it is important that we communicate the benefits of a DAF to our clients effectively.

A Donor Advised Fund is a charitable account that allows the donor to make a charitable contribution, receive an immediate tax benefit, and choose where to direct the donations from the fund over a period of time. These accounts work best when clients use the DAF to contribute highly appreciated assets (like individual stocks, ETFs, or mutual funds) to fulfill philanthropic wishes and/or for tax planning purposes.

How should you communicate this to a client?

There are many ways to support a charity, which is why we recommend working with a financial advisor or tax professional to ensure a DAF is the right option. You must first determine if the client has a charitable intent, and then determine what they want to contribute to a charity. If the client has highly appreciated assets that they have held for longer than one year, then it may make sense to begin further conversations about whether a DAF might be the right fit.

When contributing to a DAF, you receive the tax deduction for the market value of your contribution just as you would if you wrote a check, but you also avoid capital gains taxes upon the sale of the assets gifted. This results in two tax benefits instead of one. Once the client understands that the DAF is a tool that can be used to meet their needs, then you can start diving into the execution of how to set up an account, fund it, begin recordkeeping, and make grants from the account.

What other benefits are there?

If clients would like to know more about the benefits of a DAF, here are a few more points to communicate:

  • After opening a Donor Advised Fund, the donor can transfer highly appreciated shares from a brokerage account to make the contribution. The assets will be sold for cash (or can be reinvested to potentially grow their charitable giving even more) and used for ongoing charitable grants, even years down the road. A donor does not have to make a grant in the same year the contribution is made.
  • Without the mandate to make grants in the year contributions are made, the door opens to more tax strategies such as bunching contributions into one year. This has the potential to allow clients to itemize their taxes in one year and then claim the standard deduction in others while still allowing them to give the amount they wish to a charity over any time frame.
  • If your client has cash on hand that they originally planned to use for gifting, they could make the gift with their highly appreciated asset instead. Then, they could use cash to repurchase the asset that was gifted in their investment account. This effectively gives them the same exposure to that asset while at the same time increasing the cost basis. Everyone wins!
  • The DAF would result in simpler recordkeeping as the tax deduction occurs upon transfer of the asset, rather than with each individual charitable contribution. So, if your client contributes to multiple charities other than the Ronald McDonald House, they will only need to keep track of one contribution (as long as the charities they intend to gift to are qualified 501c(3) organizations).

Certain exceptions do apply, but overall, using a DAF allows for an added tax benefit, a more tax-efficient portfolio strategy, and simpler recordkeeping which can make it more attractive than traditional cash donations.

What is the behind-the-scenes process of setting up and managing a DAF?

Depending on your role in a client’s life, you may or may not be helping the client to establish the account, but it is good to know the process. Your client should work with their financial advisor to set up this account, to make the contributions from appreciated assets, and receive help from a recordkeeping standpoint. As an advisor myself, I’ve helped establish and fund countless DAFs for our clients here at CCMI. It is a simple process of setting up the account and then it is relatively simple for a client to log into their account online or call the custodian (such as Schwab, Fidelity, Vanguard, etc.) to make a grant to their charity of choice.

What is the number one mistake to avoid?

When establishing a Donor Advised Fund, one common mistake to avoid is missing beneficiaries. If your client does not list a beneficiary, the funds remaining in the account at their death will likely go to a general charitable fund owned and operated by the custodian where the account is held. Most of the time, clients want to have control over where those funds they earmarked for charity should go. There are several options for beneficiaries, but the main options are for the donor to name one or more charities as a beneficiary, appoint a successor trustee to oversee the ongoing management of the DAF after his or her passing, or elect a charitable program that the custodian has.

Naming San Diego’s Ronald McDonald House as the ultimate beneficiary of a DAF will enable your client(s) to become a member of the Many Hearts Legacy Society. The list of benefits for joining the Many Hearts Legacy Society and continuing the mission of San Diego's Ronald McDonald House can be found by clicking here.

Ronald McDonald House Charities of San Diego is dedicated to providing a home-away-from-home to families with a hospitalized child. Donor Advised Funds are tools that often allow you to stay close with your clients as they work to fund causes that are important to their values. Charitable giving is an essential part of our community and an opportunity for you to add value to your clients’ lives by helping them give efficiently. If you’d like to know more about Donor Advised Funds and how you can use them to gift to the Ronald McDonald House, please reach out to Beth van Eetveldt at beth@rmhcsd.org or Matt Ryan at mryan@myccmi.com.

Grantor Charitable Lead Annuity Trust

Provides income payments to a qualified charitable organization for a period of years, the lives of one or more individuals or a combination of the two; after which, trust assets are paid to the donor of the trust.

A power of attorney form that transfers ownership of stock.

Securities such as stock that are in certificate (paper) form.

Investments that have increased in value since the time of their purchase.

Testamentary means bequeathed through one's will.

A charitable bequest is one or two sentences in your will or living trust that leave to Ronald McDonald House Charities of San Diego a specific item, an amount of money, a gift contingent upon certain events or a percentage of your estate.

an individual or organization designated to receive benefits or funds under a will or other contract, such as an insurance policy, trust or retirement plan

I give [insert amount, percentage of the estate, or 'the rest and remainder of my estate'] to Ronald McDonald House Charities of San Diego, Inc.

Federal Tax ID #95-3251490

able to be changed or cancelled

A revocable living trust is set up during your lifetime and can be revoked at any time before death. They allow assets held in the trust to pass directly to beneficiaries without probate court proceedings and can also reduce federal estate taxes.

cannot be changed or cancelled

tax on gifts generally paid by the person making the gift rather than the recipient

the original value of an asset, such as stock, before its appreciation or depreciation

the growth in value of an asset like stock or real estate since the original purchase

the price a willing buyer and willing seller can agree on

The person receiving the gift annuity payments.

the part of an estate left after debts, taxes and specific bequests have been paid

a written and properly witnessed legal change to a will

the person named in a will to manage the estate, collect the property, pay any debt, and distribute property according to the will

A donor-advised fund is an account that you set up but which is managed by a nonprofit organization. You contribute to the account, which grows tax-free. You can recommend how much (and how often) you want to distribute money from that fund to the House or other charities. You cannot direct the gifts.

An endowed gift can create a new endowment or add to an existing endowment. The principal of the endowment is invested and a portion of the principal’s earnings are used each year to support our mission.

Tax on the growth in value of an asset—such as real estate or stock—since its original purchase.

Securities, real estate or any other property having a fair market value greater than its original purchase price.

Real estate can be a personal residence, vacation home, timeshare property, farm, commercial property or undeveloped land.

A charitable remainder trust (CRT) provides income to you, as the donor of the CRT, or to other named individuals, and does so each year for life or for a period not exceeding 20 years. The remainder of the assets go to your chosen charity.

You give assets to a trust that pays our organization set payments for a number of years, which you choose. The longer the length of time, the better the potential tax savings to you. When the term is up, the remaining trust assets go to you, your family or other beneficiaries you select. This is an excellent way to transfer property to family members at a minimal cost.

You fund this type of trust with cash or appreciated assets—and may qualify for a federal income tax charitable deduction when you itemize. You can also make additional gifts; each one also qualifies for a tax deduction. The trust pays you, each year, a variable amount based on a fixed percentage of the fair market value of the trust assets. When the trust terminates, the remaining principal goes to the House as a lump sum.

You fund this trust with cash or appreciated assets—and may qualify for a federal income tax charitable deduction when you itemize. Each year the trust pays you or another named individual the same dollar amount you choose at the start. When the trust terminates, the remaining principal goes to the House as a lump sum.

A beneficiary designation clearly identifies how specific assets will be distributed after your death.

A charitable gift annuity involves a simple contract between you and the House where you agree to make a gift to the House and we, in return, agree to pay you (and someone else, if you choose) a fixed amount each year for the rest of your life.