By: Kim Ledger, VP of Complex Assets, Ren
Generally, Americans with money give away money. In fact, based on national averages, it’s likely that about 90% of your clients give to charity every year.
Even the most giving families want to give wisely, in ways that help them reach their charitable goals as well as achieve their overall financial objectives. Therefore, it’s imperative that you provide clients with creative and sophisticated giving options that can maximize tax benefits, create philanthropic flexibility, establish family giving legacies, and more.
That’s where donating complex assets to a donor-advised fund (DAF) can be particularly useful.
The benefits of donating non-cash assets directly to charitable organizations are well documented. The approach not only can capture a charitable tax deduction for the fair market value of the asset, but giving an asset directly to a nonprofit can shield the donor from capital gains taxes on the asset’s appreciation.
However, this approach is not without its challenges. Many nonprofits aren’t equipped to take on complex assets or sophisticated enough to execute the liquidation of assets such as cryptocurrency, real estate, mineral rights, business interests, artwork and more. In addition, a donor who donates such an asset to a single nonprofit organization commits to using the entire value of the asset for that single gift. This limits the donor’s giving options, so they aren’t able to give over an extended period of time or to multiple organizations. Such limitations can significantly alter the donor’s ability to make the impact they desire or maximize the benefits of their giving.
For these and other reasons, DAFs offer an attractive solution. The following are advantages to donating complex assets to a DAF.
Similar benefits to gifts made directly to a nonprofit organization. As a fund sponsored by a 501(c)(3) charitable organization, a DAF that receives gifts of cash or non-cash may asset delivers the same tax deductions and capital-gains shield as a gift made to a single nonprofit.
Easier liquidation. A DAF will handle the liquidation of assets and any associated costs or administrative burdens.
Administrative support. The DAF will handle administration of the donor’s gift and provide all necessary documentation and tax reporting for the life of the DAF.
Giving flexibility. Opening a DAF creates a pool of funds – much like an endowment – from which grants can be issued to a number of organizations over a period of time. A single asset deposited into a DAF can be used to fund grants to any number of qualified causes [TM2] and nonprofit organizations over any period of time.
Time to assess. A client facing a capital gain might want to offset the resulting taxes through a charitable gift but might not know right away what causes or organizations they want to support. Opening a DAF allows the client to capture the tax advantages of a charitable gift without feeling pressed to immediately decide what nonprofit to support.
An ongoing voice. Although the donor who donates assets to a DAF no longer owns the asset or the wealth it generates, the donor retains the ability to make recommendations about grants from the DAF to nonprofits.
Family legacy. The donor can involve family members in grant recommendations and pass on to family members the power to make those recommendations.
Long-term impact. Once a donor establishes a DAF, they can continue to contribute to it as often and as long as desired, generating charitable tax deductions for each gift in the year in which it is made.
Windfall and liquidity event management. Because they provide immediate tax deductions and protections against capital gains taxes, DAFs can be especially helpful for donors who have experienced unexpected cash windfalls, sharp increases in portfolio value, inheritances and other events that can generate capital gains taxes.
By encouraging your clients to donate complex assets to DAFs, you can help them achieve a range of immediate and long-term benefits, ensuring that their generosity is smart, strategic, and impactful.
