Complete Guide to Donor-Advised Funds
Donor-advised funds (DAFs) are a type of charitable giving vehicle that allow individuals, families, and organizations to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charitable organizations over time.
DAFs have grown in popularity in recent years as a way for donors to simplify their charitable giving and make a greater impact.
While DAFs were previously only available to the wealthy, Groundswell makes the benefits of a donor-advised fund accessible to everyone.
In this article, we provide a complete guide to donor-advised funds, including how they work, their benefits and drawbacks, and how to set one up.
How do donor-advised funds work?
When a donor makes a contribution to a DAF, the funds are invested and managed by a sponsoring organization.
The donor receives an immediate tax deduction for the contribution, and can then recommend grants to charitable organizations at any time. The sponsoring organization is responsible for managing the DAF and distributing the grants as directed by the donor.
One of the main benefits of DAFs is that they allow donors to make a charitable contribution and receive an immediate tax deduction, even if they are not ready to decide which charities to support.
This can be especially useful for donors who want to make a charitable gift but are not sure which organizations to support, or for donors who want to spread their charitable giving out over time.
Learn the difference between a private foundation and a donor-advised fund
Benefits of donor-advised funds
There are several benefits to using a DAF for charitable giving, including:
Simplicity: DAFs are a simple way to make charitable contributions, as donors can make a single contribution to the DAF and then recommend grants to multiple charities over time.
Immediate Tax Deduction: Donors can receive an immediate tax deduction for their contribution to a DAF, even if they are not ready to recommend grants to charitable organizations.
Professional Management: DAFs are managed by a sponsoring organization, which means that donors do not have to worry about managing the investment of the funds or distributing the grants.
Flexibility: Donors can recommend grants to any IRS-qualified charitable organization, and can change the organizations they support at any time.
Anonymity: Donors can remain anonymous when making a contribution to a DAF or recommending a grant, if they choose.
How to set up a donor-advised fund
Setting up a donor-advised fund (DAF) is a simple process that can typically be done online in a few easy steps:
Choose a sponsoring organization: There are many different organizations that sponsor DAFs, including community foundations, financial institutions, and charitable organizations. Choosing a reputable organization that aligns with the donor’s charitable goals is important.
Groundswell is a flexible choice for small to enterprise-sized businesses looking to provide a charitable giving platform for their employees.
Learn to open a DAF account with Groundswell.
Make a contribution: The donor can make a contribution to the DAF using cash, securities, or other assets. The donor will receive an immediate tax deduction for the contribution.
Recommend grants: The donor can recommend grants to charitable organizations at any time, either online or by contacting the sponsoring organization.
Monitor the DAF: The donor can monitor the activity of their DAF and recommend additional grants as desired.
Donor-advised fund tax deduction information
One of the main benefits of donor-advised funds (DAFs) is that they allow donors to receive an immediate tax deduction for their charitable contributions. The tax deduction for DAFs is generally the same as it would be for a charitable contribution made directly to a charitable organization.
To be eligible for a tax deduction, the donor must itemize their deductions on their tax return and the contribution must be made to a qualified charitable organization. Contributions to a DAF are tax-deductible in the year that they are made, even if the donor does not recommend any grants from the DAF until a later year.
It is important for donors to keep in mind that there are limits on the number of charitable contributions that can be deducted each year.
Limits for charitable contributions that can be deducted for the tax year 2022
The limits on the number of charitable contributions that can be deducted for the tax year 2022 depending on the type of organization to which the donation is made and the taxpayer’s filing status.
For the tax year 2022, the limits are:
For donations made to public charities and certain private foundations, the limit is generally 60% of the taxpayer’s adjusted gross income (AGI).
For donations of appreciated capital gain property made to public charities and certain private foundations, the limit is generally 30% of AGI.
For donations made to certain private foundations and veterans organizations, the limit is generally 30% of AGI.
For donations of appreciated capital gain property made to certain private foundations, the limit is generally 20% of AGI.
It’s always recommended to check with a tax professional or the IRS to confirm the limits that apply to your specific situation.
It is also important for donors to retain documentation of their contributions to a DAF, as they may be required to provide proof of their charitable contributions in the event of an audit.
Software like Groundswell keeps track of all the important information you need come tax time.
Donor-advised funds distribution rules
The distribution rules for donor-advised funds vary depending on the specific terms of the fund and the sponsoring organization. In general, however, the following rules apply:
- Donors must make an irrevocable contribution to the fund in order to participate. This means that the donor cannot change their mind and take the money back after making the contribution.
- Donors can recommend how their contributions are invested and how the earnings are distributed to charitable organizations, but the sponsoring organization ultimately has the discretion to approve or deny the recommendations.
- Donors cannot receive any personal benefit from the fund, such as the use of donated assets for personal purposes or the receipt of goods or services in exchange for their contribution.
- Distributions from donor-advised funds must be used for charitable purposes. This means that the funds must be used to benefit a charitable organization or to support a charitable program.
- Donors must follow all applicable federal and state laws, including laws related to self-dealing and excess benefit transactions.
- Sponsoring organizations may have additional rules and requirements for donor-advised funds, such as minimum contribution amounts or distribution frequencies. It is important for donors to understand and comply with these rules in order to maintain the tax-advantaged status of their contributions.
How Groundswell uses the DAF to enable corporate giving programs.
Groundswell is a corporate giving platform revolutionizing access to DAFs.
Donor-advised funds power Groundswell accounts. Groundswell’s DAF infrastructure gives companies and their employees a better, smoother experience when compared with traditional workplace giving programs.
With Groundswell, companies can deposit gifts directly into their employees’ accounts.
Groundswell’s infrastructure also enables privacy and security for employees and employers. Since charitable giving can be deeply personal, adding a level of privacy aids in fostering a corporate culture of generosity and giving.
Learn more about setting up a corporate giving program and DAF with Groundswell.
The 5 Best Donor-Advised Fund Software in 2023
There are many options if you’re looking for the best donor-advised fund software.
You can undoubtedly look at every single one of them, but it’s not necessary. The top donor-advised funds offer the same basic functionality. The choice comes down to which provider is really in service to the nonprofits donors want to support, offering the service, convenience, and flexibility the company and its donors require.
DAFs are no longer just a tool for the uber-wealthy. Individuals can use them as well. One of the easiest ways to do this is through a corporate giving platform.
Donor-advised funds (DAFs) provide a simple solution to support tax-deductible contributions. They are similar to a charitable foundation without the fuss. In fact, one of the best things about DAFs is how much of the money goes to work for nonprofits.
Although foundations beat DAFs hands-down with 900% more in assets, DAFs comprise 42% of the giving. In addition to being more cost-efficient, DAFs don’t require public disclosures like foundations.
How to compare donor-advised fund software
As mentioned, many of the features and benefits are the same when you’re comparing the top contenders. Most donors will be concerned with fees and minimums that allow them to maximize their charitable contributions. In this article, we’ll compare Groundswell, Greater Horizons, Schwab Charitable and Vanguard Charitable.
The five best DAF software compared
Fees: Donors pay no annual fee.
- Account minimum: $0
- Contribution minimum: $1, the lowest in the industry
- Grant minimum: N/A
Groundswell is the cost-effective option with no fees and a $1 minimum contribution amount. It offers a superior user experience in a mobile technology platform.
2. Fidelity donor-advised fund
Fees: Annual administration fee 0.60% or $100
- Account minimum: $0
- Contribution minimum: $0
- Grant minimum: $50
Fidelity offers a set of tools that helps donors find places to donate to and keep track of their donations. However, the annual cost of administration turns people away to other options.
Fees: Greater Horizons has a $500 minimum annual fee and is tiered according to the balance but pricing is not available online.
- Account minimum: $0
- Contribution minimum: $0
- Grant minimum: $0
Greater Horizons is a good option for those who don’t want the constraints of minimums. However, the signup process is largely manual.
Fees: Schwab has a $100 minimum annual fee and is tiered according to the balance. Fees are the second cheapest for accounts under $25,000.
- Account minimum: $0
- Contribution minimum: $0
- Grant minimum: $50
Schwab offers an easy signup process but you’ll need a Schwab brokerage account and the DAF has limited customer service hours.
Fees: Vanguard has a $250 minimum annual fee and is tiered according to the balance. Fees are the second cheapest for large accounts.
- Account minimum: $0
- Contribution minimum: $5000
- Grant minimum: $500
Although Vanguard has lower fees than some, the minimum contribution amount is one of the highest.
Why Groundswell is the Obvious Choice
As mentioned, the main reason DAFs are so popular is that they offer tax advantages. Much like a retirement account, DAF account funds can be invested in appreciable assets and these investments grow tax-free. Donors, themselves, can donate non-cash assets, both privately and publicly held, for the full cash value without having to pay capital gains taxes. So, the donor gets a tax break and once they decide to disburse the funds to a non-profit, there may be more money to give. DAFs used to be available only to the wealthy and were sometimes exploited to pass wealth on to future generations without tax implications.
The biggest advantage of the Groundswell option is its affordability and accessibility. Groundswell democratizes DAFs for all. With Groundswell, every employee can have a donor-advised fund. In addition to boasting the lowest operating costs, Groundswell is doing a few other things differently. The Groundswell philanthropy-as-a-service platform decentralized the process, making it easy for employees to
- Donate whenever and wherever they choose
- Make affordable contributions
- Allocate a portion of their payroll into their donor-advised fund
- Take advantage of corporate matching opportunities
Groundswell puts it all in a mobile-first app available on iOS and Android. It’s even easier for companies. They can include DAF contributions as a component of their overall compensation packages. Employee donations are safe, secure, and confidential.
With Groundswell, your employees can be assured that what’s important to them is important to you. Like to know more? Contact Groundswell today.
5 Benefits of Donor-Advised Funds for Corporations
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.
Recap of the Donor-Advised Fund
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.
5 Benefits of DAFs for Corporations
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.
1. Reduced Tax Liability
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.
2. Save on Capital Gains
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.
3. Multiple Donation Options
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.
4. Unlock Investment Opportunities
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.
5. Increased Employee Engagement
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:
- Focus donations on the sector your business operates in. For example, if your business is in the hospitality sector, you can “give back” by supporting charitable causes linked to food banks, sustainability or homelessness.
- Tie your donations to your founder story or company ethos. Donations can ensure that the obstacles the company had to overcome in its early years are resolved for future generations (from equity and diversity to health and accessibility).
- Invite input from your employees and customers and reflect their wishes. What matters to them?
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.
How Groundswell Is Different
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:
- Accessible: You don’t have to be a high net worth individual with millions to spare. Groundswell allows you to start with a contribution of just $1.
- Efficient: We create personal giving accounts for each employee, which can be easily administered without tracking receipts and vetting nonprofits. Think of it as a 401(k) for corporate giving.
- Discreet: All employee donations are kept private, so your giving program is more equitable and inclusive. We respect that charitable giving is an anonymous, private affair for many.
- Diverse: Instead of nailing your company mission to a single cause, Groundswell allows you to respect and support all of your employees’ diverse perspectives.
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.
Why You Should Consider Providing a DAF in Your Financial Wellness Benefits
With 42% of employees in full-time work struggling to make ends meet, financial wellness benefits are no longer a bonus perk that Human Resources can offer. They are a business priority. Uncertain economic conditions, from the aftershocks of the pandemic to rising inflation, compel employees to make their money go further. Financial wellness benefits offer a framework for investing in the future, and no more so than with donor-advised funds (DAFs). Employees don’t have to compromise on their charitable giving because of financial health challenges. In fact, DAFs can unlock some attractive tax advantages.
What Are Financial Wellness Benefits?
Employees are increasingly looking at the financial wellness benefits a company offers with the same interest they pay to the starting salary, health and well-being perks, and flexible working options. That’s because financial stress is on the rise. When workers are preoccupied with their personal finances, they’re not only less productive. They’re also likely to seek a more attractive offer from an alternative employer. Workers want the most sought-after financial wellness benefits:
- Retirement planning ranks as the #1 priority. Employees want to feel secure about their future after work.
- Insurance is another must-have. Health, life and disability coverage provides a safety net should circumstances change.
- Financial education can help employees save, limit their tax liability, and build a budget that supports personal growth.
- Investing opportunities allow employees to put their money to work so that they’re earning even when they’re away from the office.
Why It’s Important
Personal and professional lives are never completely separate and that’s why employee benefits are so important. Bearing in mind that one in four employees claim that financial worries negatively impact their professional performance, companies who take the initiative with financial wellness packages should look forward to:
Salary isn’t everything, particularly to Gen Z. One of the issues that the Great Resignation highlighted is that workers are fleeing roles that don’t align with their personal goals, but they will invest their skills in a company culture built around strong values.
Corporate giving is one of those values that still register high on the wishlist. There’s a sense that a company’s obligations don’t stop at its internal gender equality, diversity and inclusion goals. The impact a business makes on the local and wider community is just as important, and philanthropy is a key measure for supporting that vision.
Why You Should Include Donor-Advised Funds
The benefit that a DAF brings to corporate giving is that it balances philanthropy with financial benefits for the employee. By donating through a DAF to a public nonprofit sponsor organization, employees can gift cash, stock, real estate or other assets. Donations of the latter (real estate and assets) tend to happen at the corporate level, but individual employees can unlock immediate tax advantages by gifting cash or stock through a DAF. The advantages of giving through a DAF include:
Reduce Tax Liability
Individuals can claim a tax deduction of up to 60% of their adjusted gross income if they give through donor-advised funds — and there’s no need to submit piles of extra paperwork to the IRS.
Avoid Capital Gains on Stocks and Securities
That’s particularly attractive for workers at tech firms or startups, where stock options and signing bonuses are a key employee retention strategy. Employees at Amazon, for example, receive restricted stock units (RSUs) that yield big dividends in years three and four.
The only restriction on giving through DAFs is that the threshold is usually high. Although the minimum donation with some brokerages is as little as $5,000, these are the exceptions. Morgan Stanley and Vanguard, for example, start at $25,000, making them more suitable for giving at a corporate rather than individual employee level.
That’s why Groundswell is so innovative within the corporate giving space. Employees can have their own DAF and get started with as little as $1, meaning that any employee can access a personal giving account and enjoy the tax benefits immediately. Find out more about corporate giving as an employee benefit by contacting us today.
Donor-Advised Fund vs. Private Foundation: What’s the Difference?
Donating directly to a charitable organization might be the simplest way to give, but there are also various philanthropic vehicles available for minimizing taxes and maximizing impact. Two of the better known structures are donor-advised funds (DAF) and private foundations.
Donor-Advised Fund vs. Private Foundation
While there are 1.4 million registered public charities in the United States, less than 1% are donor-advised funds. Likewise, private foundation numbers, at around 90,000, are relatively modest. The impact of these nonprofit organizations, on the other hand, can be considerable. Here are the key differences between donor-advised funds and private foundations.
What Is a Donor-Advised Fund?
The donor-advised fund (DAF) is a tax-advantaged personal giving account established at a public nonprofit sponsor organization. The account is opened in the donor’s name and contributions are made to the organization(s) chosen by the donor. That might be a charity, but it could also be a university, religious foundation or financial institution. DAFs are enjoying unprecedented popularity with donations jumping by 27% since 2019. Giving from DAFs topped $34.67 billion in 2020, with the five largest — Fidelity, National Philanthropic Trust, Schwab, Vanguard and Silicon Valley Community — accounting for $24.5 billion alone. That said, the size of the average fund is a lot less, at around $150,000. Donors can gift cash, stock, real estate or other assets to a donor-advised fund.
Traditionally, DAFs have been viewed as a tax-efficient way to give over a longer period of time without any annual obligation to distribute funds (thus the nickname “zombie philanthropy”), but now Groundswell is empowering corporations to unlock the advantages through our Philanthropy-as-a-Service platform. Whereas DAFs have conventionally been the preserve of the ultra-rich and brokerages, we’re offering access starting at $1 million (the lowest minimum contribution in the industry) to help employees with meaningful giving that benefits communities.
What Is a Private Foundation?
A private foundation, on the other hand, is a legal entity established solely for charitable purposes. Usually launched as a family or organization’s legacy initiative, the private foundation is a long-term project whose influence can spread worldwide. That’s certainly true of three of the biggest three: the Bill and Melinda Gates, Ford and Getty foundations.
Private foundations are administered by a board of directors and can receive funds via real estate, investment assets or charitable donations. Unlike public charities, however, they usually derive their financial support from a single source, whether it’s a person, family or organization.
Key Differences Between Donor-Advised Fund vs. Private Foundation
There are a few important distinctions to note between the two, particularly when it comes to the overarching mission and vision.
Most donor-advised funds are intended to support charitable giving during the philanthropist’s lifetime, although some do extend to a further generation or two. One of the criticisms of DAFs is that rather than distributing donations to non-profit organizations in need, they are used by the rich to “park” private wealth in a tax deductible fund. That’s not the Groundswell approach. Our platform is designed to establish a minimum annual distribution for DAFs to bring communities to life, not mothball zombie philanthropy funds. Private foundations, by contrast, focus firmly on the future legacy, and most are established as permanent entities that will outlive the founder.
The board of directors (which can include the founder) manages a private foundation. For a DAF, the sponsor organization has control, although the donor may give their recommendation or advice on how grants are distributed.
Private foundations often celebrate a particular goal or set of values, so concealing the founder’s identity is rarely a concern. DAFs do offer confidentiality, so they are a useful vehicle for benefactors who want to support a charitable organization anonymously.
There is a lower barrier to entry for donor-advised funds, some of which can be set up with as little as $5,000, although upwards of $100,000 is more common. Because all legal formalities are covered by the parent organization, DAFs are relatively easy to set up. By contrast, private foundations take longer to establish, and the legal, administrative and tax affairs require professional support. Private foundations usually start with funds of $10 million or more.
Arguably the biggest difference between the two is in terms of tax regulation. For private foundations, the IRS dictates that a 5% minimum of net investment assets must be distributed annually in the form of grants or administrative expenses. To set up a private foundation, the founder(s) must apply for recognition of exemption under Section 501(c)(3) with the IRS, and will subsequently need to file detailed tax returns on board members’ compensation, fees and grants. All are a matter of public record.
Donor-advised funds, on the other hand, do not require any annual grants to be administered but do offer immediate tax advantages, particularly if the donor is receiving a windfall, inheritance or revenue from a business or property sale. Neither do DAF donors have to file tax returns to the IRS, not least because ultimate control of the DAF is with the sponsor nonprofit organization.
We’re Here To Support Your Giving Efforts
Despite the “zombie” tag, DAFs are by no means evil by nature. In fact, they can be an effective way to drive meaningful giving that brings communities to life. To find out how we’re raising zombie philanthropy from the dead with an employee benefit that benefits the world, get in touch with us today.
Donor-Advised Funds: Tax Benefits for Givers
Donor-Advised Funds’ tax benefits are widely known and well documented, and are one reason why the popularity of DAFs has surged in recent years. However, how do DAFs actually work, and what tax benefits do they create? Let’s get into the nitty-gritty.
How DAFs Work
A DAF allows a donor to contribute a sum of money into an account held with a sponsoring 501(c)3 nonprofit organization, such as a public foundation, and take an immediate tax deduction in that tax year.
One of the benefits of Donor-Advised Funds is that donors can then take their time in determining when and where to grant those funds to recipient charities. This ties to the key Donor-Advised Funds tax benefit – it allows a donor to disaggregate their decision to optimize their tax deduction from their decision about which charities to support and how. (However, note that this charitable giving tax deduction has also opened DAFs up to legitimate criticism that they serve primarily as a tax avoidance vehicle, and only secondarily as an effective tool for philanthropy. See here for more.)
DAFs also provide donors the ability to donate non-cash assets such as appreciated stock, real estate, and collectibles such as art – all as a form of charitable donation tax credit. With thoughtful and well-advised planning, donors can reap the Donor-Advised Funds tax benefits while simultaneously increasing the amount they contribute to charity by utilizing these non-cash donations.
A Typical DAF Scenario
Here’s how tax deductions for contributions to Donor Advised Fund work:
If a donor has held an asset such as a stock for more than one year, the donor can contribute that stock to their DAF. The sponsoring foundation that controls the DAF then liquidates that asset (sells the stock), making the full value of the sales proceeds available for that donor to recommend to a charity.
By taking this approach, the donor has avoided paying the entirety of their capital gains tax obligation – which is either 15% or 20% at the time of this writing, depending on the donor’s income level.
Even better, the donor is able to deduct the full fair market value of the asset at the time of transfer into the DAF, significantly reducing taxable income.
Let’s look at the math.
Let’s imagine a donor, we’ll call him Phil Anthropy, bought 100 shares of Apple stock at $5 (don’t you wish you bought Apple for that price now!). This gives Phil a cost basis of $500 for that purchase. If five years later Apple is now worth $50 per share, Phil now owns $5,000 worth of Apple.
Now imagine it’s the end of the year and Phil wants to make a $5,000 donation to his favorite charity. If he doesn’t have the cash, Phil’s first option is to sell his Apple stock for $5,000. When he does this he’ll immediately incur a capital gains tax on his appreciated value – which is $4,500 ($5,000 current value minus the $500 cost basis). If Phil’s capital gains tax rate is 15%, his capital gains tax bill will be $675. It also means that Phil only has $4,500 to give to charity!
The Math of DAF
Next, let’s assume that Phil has a Groundswell account, which is powered by a Donor-Advised Fund. In this scenario, Phil can contact Groundswell to transfer his Apple stock directly into his DAF. Once received, Groundswell sells the position for $5,000 and puts that cash in Phil’s account. Phil then recommends a grant to his favorite charity for the full $5,000. In Scenario 2, Phil pays zero capital gains taxes and is able to deduct the full fair market value of the stock – $5,000 – off his income taxes. That’s a $500 higher deduction than scenario 1 ($5,000 vs. $4,500).
As you can see, Scenario 2 both gives more money to charity and saves nearly twice as much money in taxes. We enjoy the usual Donor Advised Funds tax benefits – and we do more good.
But there is actually a third scenario, and in this scenario the donor gets the best possible outcome: they still give a significant sum to charity and they pay zero taxes. In Scenario 3, a donor works for a company that has implemented a modern day, decentralized approach to its corporate philanthropy.
DAFs & Philanthropy-as-a-Service
With this Scenario 3, a company has chosen to make charitable giving a component of its total compensation or total rewards approach. In this scenario, Acme Corporation understands that its employees, like Phil, are likely already giving a portion of their take-home pay to charitable causes.
Knowing this, Acme Corporation has decided to implement a Philanthropy-as-a-Service solution, like Groundswell, to decentralize corporate giving and provide Phil with an annual charitable giving allowance. Using Groundswell, Acme deposits $5,000 annually directly into Phil’s Groundswell account, which Phil can then direct to the charity of his choice.
The Donor-Advised Fund tax benefits here are astounding. Because the $5,000 is deposited directly into Phil’s DAF – and is never received by Phil as actual income – Phil never has to pay payroll taxes on the funds. The US Federal Government assesses payroll taxes on all earners, and some states pile on additional tax requirements. Current federal payroll taxes for individuals are 7.65% (6.2% for Social Security and 1.45% for Medicare). This means that Phil isn’t responsible for paying the $382.50 in payroll taxes that would have been automatically withheld from his paycheck.
Here, Acme Corporation gets the charitable tax deduction because the contribution to Phil’s Groundswell account qualifies as a contribution to a 501(c)3 public charity, while Phil gets to feel great about sending a big donation to his favorite cause.
Leveraging DAFs, the Groundswell Way
- The key Donor-Advised Fund tax benefit is providing donors a simple, tax-advantaged vehicle to streamline their charitable giving and ensure their deductions are fully accounted for
- Donor-Advised Funds offer incredible opportunities to contribute non-cash assets such as publicly traded equities, creating increased tax advantages for the donor and extra revenue for the nonprofit
- Companies that choose to decentralize their philanthropy can provide employees with a significant financial benefit by contributing funds directly into an employee-held DAF, allowing the company to take the tax write-off and the employee to still make meaningful donations to their favorite charities
Night of the Living DAF: How Groundswell is Raising Zombie Philanthropy From the Dead
No one likes zombies. They’re noisy. They’re disgusting. Worst of all, they try to eat your brain.
But perhaps the spookiest thing about them? They’re mindless. Zombies are automatons who amble along without thinking. Left to their own devices, they would go on like that, mindlessly, forever. Never changing, never helping, never improving.
It is this critique of the undead that gets levelled at a form of charity dubbed zombie philanthropy. In this critique, the drivers of zombie philanthropy are Donor-Advised Funds (DAF)s. To quote The Washington Post:
This is problematic. We’re in a world where there is no time to waste. There are too many crises facing our country and global community and it serves no one to have money sitting on the sidelines. At Groundswell we’re going to change that by building a platform that will better facilitate these funds and empower donors to make an impact quickly.
WTF is a DAF and who contributes to them?!
A Donor Advised Fund allows donors to put all of their charitable dollars into one single fund, receive an immediate tax deduction, grow those assets over time, and distribute assets to nonprofits of their choice at any given time. It was established in the 1930’s to handle charitable donor-advised fund contributions on behalf of organizations, private individuals, and families. Since then, DAFs have been primarily utilized by the ultra-wealthy. According to the 2020 Donor-Advised Fund Report, grants to qualified organizations from DAF accounts totaled $27.37 billion in 2019, up 15.4% from $23.72 billion in 2018. But considering there are over $140 billion in total assets squirreled away in DAFs, $27 billion is merely a fraction of the impact potential they represent.
Why Do DAFs (Sometimes) Become Zombies?
Donor Advised Funds are popular due to their ease of use. Donors typically struggle with deciding where to direct their philanthropic contributions, especially when large sums of low-value assets are contributed. Managing several beneficiaries while meeting a deadline might be difficult. As a result, one-stop-shop giving simplifies the philanthropic process.
Why have DAFs become the target of “zombie philanthropy” accusations? The critiques typically go like this:
- Unlike with private foundations, there is no requirement for minimum distributions from Donor Advised Funds. As a result, investors routinely deposit significant amounts of equity or cash in those accounts with no need to distribute them right away. This means that a DAF’s capital can sit static for years or decades, and never actually reach a nonprofit.
- This is particularly worrisome at a time when nonprofits need funds urgently, not in a distant future.
- Some individuals use DAFs primarily for income tax reductions, balancing their tax bill with their giving, so that the upside, like capital gains, is neutralized. Others use DAFs to pass on money to their offspring, once again with minimal taxes.
With DAFs, people can sidestep learning about the best causes in place of simply dumping the money in a pot on the advice of someone else.
We recognize these critiques. Any tax instrument can be manipulated depending on a user’s intentions (we’re looking at you, Peter Thiel). However, we don’t believe DAFs are inherently evil and are instead breathing new life into the zombie philanthropy model.
Groundswell reaps the benefits of DAFs without the downsides. And we believe that this approach can be scaled to reach any prospective donor, not just the ultra-rich.
How Groundswell is Raising Zombie Philanthropy From the Dead
Groundswell is built differently.
Legacy DAF providers also happen to be massive asset managers. No wonder their platforms are designed to keep money in the DAF, and not move it out to charity. In fact, it’s in their best interest for it to play out that way.
However, Groundswell is built to move money as efficiently as possible out of the system and into the hands of charities.
The objectives of our platform are aligned directly with the goals of charities – including the goal of disbursing as much money as possible into the community. That’s probably because we were founded by a former nonprofit executive, a key difference in Groundswell vs. the competition.
We have no beef with DAFs and not every DAF fund is a zombie. The fact is, when funds are transferred to a DAF, they will eventually finance a program sponsored by the donor, though it may be slow and delayed funding means delayed impact.
As we already mentioned, we believe that Donor Advised Funds are not inherently evil – even if they are exploited by a large number of ultra-wealthy individuals and fail to generate as much good as intended. In principle, DAFs can be powerful but, like everything else, they must evolve.
That’s why Groundswell is supportive of recent talks aimed at reforming Donor Advised Funds to include, among other things, a minimum annual distribution. DAFs, built and leveraged appropriately, can bring massive efficiencies to the nonprofit sector and the giving of ordinary Americans.
So instead of allowing these legacy Donor Advised Funds to shuffle around mindlessly like zombies, let’s build an alternative like Groundswell that breathes life back into the Donor Advised Fund and democratizes philanthropy for the 99%.