Help Others Through Charitable Giving and Receive a Tax Benefit

One of our greatest pleasures is helping our clients give to their favorite charities. There are many ways to give beyond simply writing a check, and our expertise can prove highly beneficial.


Presently, the tax code offers incentives for gifting of one’s assets or income. Tax deductions are given for current contributions and, for estate owners, charitable gifts can reduce the size of the estate to help minimize estate taxes.

Often times, an individual will designate a charitable beneficiary in their will to benefit the organization after the individual dies. By using charitable gifting techniques, a donor may be able to benefit the charity while living without having to sacrifice the income that an asset can generate. Understanding how properly structured charitable gifts can provide current benefits for both the donor and the charity could be important for the charitably inclined.


What is a Donor-Advised Fund?

A donor-advised fund is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. A donor-advised fund may be held at our custodians (Charles Schwab and TD Ameritrade Institutional) and invested in one of our low-cost, diversified portfolios.


Private Foundations vs. Donor-Advised Funds

For very high net worth people looking to maximize the impact of their charitable giving, a private foundation comes to mind. Its primary advantage is the flexibility to give directly to recipients in need. However, there are some distinct disadvantages that should motivate sponsors to consider the alternative of a donor-advised fund (DAF).

With the required specialized state and federal filings, establishing a private foundation can be costly. The sponsor should expect to spend anywhere from $4,500 to $25,000 in legal fees, according to the American Endowment Foundation. A DAF, on the other hand, has no initial setup costs. Additionally, private foundations incur ongoing expenses for taxes (1-2% of income and realized gains), staffing, rent, travel, accounting, annual filing costs, and other operational expenses. Aside from potential investment advisory fees, a DAF will incur an annual administrative fee, usually under 1% of assets.

Donations to private foundations receive less favorable tax treatment than donations to DAFs. While cash donations to a foundation are deductible up to 30% of adjusted gross income (AGI), they are deductible up to 60% of AGI for a DAF. Both allow a 5-year carryover. For appreciated assets, the allowable foundation deduction is 20% of AGI compared to 30% for a DAF.

Private foundations are legally required to disburse a minimum of 5% of their holdings annually, regardless of market conditions. Furthermore, donations and investments made by the foundation are a matter of public record. One possible workaround is to create a complementary DAF to the foundation. In our opinion, a private foundation only begins to make sense at an initial amount of $5 million or higher. In some cases, it may be desirable to collapse a foundation into a DAF. Of course, this should only be done with the assistance of a competent attorney. Talk to us about establishing a donor-advised fund or a private foundation  to meet your philanthropic goals.


Socially Responsible Investing (SRI) in Your Donor-Advised Fund

For those investors who desire to align their investment decisions with their views on the importance of preserving the environment and mitigating adverse climate effects, Clarity offers portfolios that utilize the two sustainability funds from Dimensional Fund Advisors that cover U.S. and international developed market equities. These funds place a large emphasis on consideration of greenhouse gas emissions, but they also consider the following factors: Land use and biodiversity, toxic spills and releases, operational waste, and waste management.

The top contributors to greenhouse gas emissions can be underweighted or excluded from the portfolio. Separate consideration is given to potential emissions from reserves, as certain energy companies are particularly vulnerable to future regulations limiting the amount of fossil fuels that can be consumed. Other environmental and social sustainability variables considered for the possibility of excluding certain companies are: Factory farming, cluster munitions manufacturing, tobacco, and child labor.

We can also include the Vanguard FTSE Social Index Fund which seeks to track the investment performance of the FTSE4Good US Select Index—a benchmark of large- and mid-capitalization stocks that are screened based on social criteria such as workplace issues, environmental issues, product safety, human rights, and corporate responsibility. 

The weighted expense ratios of our Socially Responsible Investing portfolios range from 0.21% to 0.27% annually.

Source: "The Evolution of Sustainability Investing", Dimensional Fund Advisors, May 2016.