Due to a recent IRS mistake, some of the most discreet billionaire philanthropists are now known to the public. The news was first reported by Bloomberg when the IRS failed to excise two pages from a report by the Goldman Sachs Philanthropy Fund before making the report public. Because of the mistake, it’s now known that Steve Ballmer, the former Microsoft Chief Executive Officer, Laurene Powell Jobs, the widow of Steve Jobs, and Jan Koum, who co-founded WhatsApp gave a combined $2.54 billion to the Goldman Sachs Donor Advised Fund.
To understand why these mega-givers gave to Goldman versus more traditional private charities, it’s important to first understand what a Donor Advised Fund really is. Traditionally the wealthy had only a couple options to donate to charity. These donors could make a one-time donation to a non-profit of their choosing, or they could create their own charitable fund, put a bunch of money in it, and then distribute that money over time in a manner of their choosing.
The DAF offers another option. With a DAF donors can place money into an account, let it mature and then disburse it gradually. It’s essentially a waiting room for charitable giving. Let’s say, for instance, an investor decides to place $250,000 in a DAF, and then they have an investment advisor manage that portfolio. The donor receives an immediate deduction on their taxes for the donated money, which is really still just sitting in the fund. Then, a year later, they contact the fund and have the money disbursed to a specific charity, say, United Way. The good news here for givers is that they can essentially park the donation in a fund where it continues to grow, and disperse the money in years where a hefty donation will help offset their tax bill.
According to the National Philanthropic Trust, there are some huge tax savings for donors as well compared to the tax deductions for setting up a charitable foundation. By putting their money into a DAF, donors get a tax deduction with a limit of 60 percent of their adjusted gross income, versus the 30 percent for setting up a private foundation. What’s more, if the gifts are stock or real property, there’s a tax deduction of 30 percent with donations to a DAF, but only 20 percent of AGI with a private foundation. Those are some pretty big numbers for major donors, which explains why Goldman Sachs Philanthropy Fund has done so well.
Traditional Charities May Suffer
Some people in the philanthropic community aren’t impressed with the effect that DAF giving has had on their bottom line. United Way has been specifically hard hit with more donors placing money into DAF’s than in previous years. In fact, in 2016, Fidelity Charitable Gift Fund overtook United Way to seize the number one spot in the Philanthropy 400, that list that ranks charities that raise the most capital from private sources.
Fidelity raised $4,076,302,537 in private support during 2016 while United Way Worldwide, which has topped the list more than 20 times since 1991 raised only $3,539,672,326 from private sources. The Goldman Sachs Philanthropy Fund may even edge ahead of the United Way in terms of dollars collected. It was third on the list in 2016 raising $3,190,157,926 in private support. This was the highest ranking Goldman Sachs has received since its appearance on the Philanthropy 400.
Investing in a DAF
Donors looking to invest in a DAF should shop around, like with all charitable donations, each entity has different terms and donation benefits. The key for first-time givers will likely be the minimum investment amount accepted which can range from as low as $5,000 to over $25,000 initial investments. Another point that would-be investors should pay attention to is the administrative fees collected by the DAF.
The bottom line here is a DAF can be a great way to give to charitable entities while maximizing the tax deduction benefits. Those interested should speak to their financial advisor and consider the options.