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

“Charitable planning is becoming more and more an area of interest to donors as part of their overall financial planning,” Fred Kaynor, managing director of relationship management, marketing and partnerships at Schwab Charitable, tells ThinkAdvisor in an interview.

The fastest growing charitable-giving vehicle in the U.S. is the donor-advised fund. Introduced in the 1930s, it wasn’t until some 60 years later that it began to pick up speed.

Schwab is one of the largest providers of DAFs in the country. In 2022, its donors increased grants to charity by 7% over 2021, to more than $4.7 billion, representing a record 995,000 grants.

Kaynor leads Schwab’s team that works with donors, financial advisors and the charities.

“2022 was our year to shine. Market volatility was up, and economic uncertainty was rampant, [but] our donors gave more to charity [through DAFs] than they did the previous year because there was a great need,” he says.

They had already transferred those assets to DAF accounts when the market was strong, notes Kaynor, winner of a 2022 ThinkAdvisor LUMINAIRIES award in the category of community impact.

In the interview, he sheds light on the differences between a DAF and a private foundation. Some folks have both, he notes.

DAFs owe their popularity to being “a very easy, low-cost, tax-smart, straightforward solution” to charitable giving, according to Kaynor.

A tax deduction, based on asset value, is made at the time a contribution is deposited into the donor’s DAF account.

DAFs avoid capital gains taxes that would have been incurred if the donor had sold the assets first then donated the proceeds.

Once the assets are in a DAF, they are liquidated and invested for growth. The donor decides which charity receives the grant and when.

Every DAF contribution is an immediate and irrevocable gift to charity.

In financial services for more than 25 years, Kaynor was previously in senior posts at Mastercard and Visa.

ThinkAdvisor recently interviewed the manager, who was speaking by phone from Schwab headquarters in San Francisco.

He explains that although private foundations offer more “flexibility, they tend to be more expensive to administer [with] a variety of … costs that don’t exist for DAFs.”

Here are excerpts from our interview:

THINKADVISOR: Why was 2022 such a good year for donor-advised funds, and in particular, for Schwab Charitable?

FRED KAYNOR: 2022 was our year to shine. Market volatility was up, and economic uncertainty was rampant.

But there were plenty of assets in people’s DAF accounts irrespective of what was happening in the market and economy. That didn’t impact how much they gave.

They had contributed their assets when they had them to give — when the market was strong, when their stock was performing at a very high level.

That’s when they put assets in their DAF accounts, and we invested them on their behalf for growth.

Our donors gave more to charity than they did the previous year because the need [for charity donations] had grown, and they gave with maximum impact.

Why are DAFs so popular with both donors and financial advisors who support them?

It’s an investment account for charitable giving — a very easy, low-cost, tax-smart, straightforward solution.

A lot of people have turned to this [vehicle] because they want a very tax-efficient, easy way to maximize their philanthropic impact.

They also want a mechanism that they can use not only to fulfill their short-term philanthropic goals but their long-term ones as well [via investing] the assets for growth.

In what way are DAFs tax efficient?

Donors receive a tax deduction at the time they make their contribution [into the DAF account], based on its value.

So the donor avoids capital gains that they would otherwise incur if they were to sell the assets first and then donate the proceeds.

This can mean up to 20% more that’s available to go to charity.

How is charitable planning a part of financial planning?

We hear, on an ongoing basis, that charitable planning is becoming more and more an area of interest to donors as part of their overall financial planning.

We have a team of charitable [-giving] consultants who partner with advisors to provide tools and resources that enable them to start client conversations related to philanthropy.

Frequently, these advisors engage with us on a very extensive level; oftentimes [the consultants are even brought in] when the [financial advisors] have client consultations about anything related to philanthropy and charitable giving.