By Kelly Mahoney
Soon, it’ll be that time of year again when I sit down to binge-watch one of the many made-for-TV versions of Charles Dickens A Christmas Carol. Watching Ebenezer Scrooge evolve from a miser into a philanthropist gives me some serious warm, fuzzy feelings – I mean, who among us doesn’t want the best for every single one of the other 8 billion people living on Earth?
Yet being charitable doesn’t mean that we need to toss aside our own financial opportunities. I chatted with Nick Flores, a managing director and guru of impact investing at Caprock, to get his take:
“Historically, most people have looked to philanthropy as the best, if not only way to advance a family’s values. But the good news is that in the last decade or so, the discipline has really grown up – it now enables people to do both – to advance their values and to generate a financial return. And hopefully we can also generate some quantifiable, measurable, durable, social and environmental benefits along the way.”
How does Flores help his clients align their wealth with their values? One way is by using a charitable structure called donor-advised funds, or DAFs. Read on to learn a little bit about DAFs, the tax benefits associated with the vehicle, and how you may want to help your clients think about giving.
The Nitty-Gritty About DAFs
A DAF is a popular charitable giving vehicle known for its flexibility and ease. To establish one, a family, individual, or organization first makes an irrevocable contribution (a gift that is complete and cannot be returned) of their assets, including cash, publicly-traded securities, mutual funds, and real estate, to the DAF.
These contributions are recorded as donations, which are reflected in the newly minted DAF account. Over time, these contributions can be allocated to the 501(c)(3) public charity of their choosing. And for people who want to involve their family in their giving, their kids or grandkids may participate in selecting charities that could serve as grantees. It’s helpful to know that DAFs aren’t subject to estate laws, which allow future generations to use the vehicle to be the gift that keeps giving.
There’s an Immediate Potential Tax Benefit
DAFs’ tax benefits impact more than just families.
No matter if your client is a family, individual, or organization, once a DAF contribution is made, they’ll be eligible for a current-year tax deduction, which may allow them to be more flexible and strategic about their giving decisions. They can either use the assets they’ve contributed to make grants to other public charities of their choice, or they may let them sit and grow over time – completely tax-free – allowing them to make even greater contributions in the future.
Non-cash assets transferred into a DAF can be gifted without incurring capital gains taxes, allowing all of the proceeds to be given to – and ultimately used by – the charities your clients believe are most impactful.
How to Think About Giving?
What should your clients think about when determining which charities may be the best choice for their interests? At Ethic, we think it’s important to consider both the topic area you’re supporting and the charity itself.
When we’re looking at topic areas for giving, we look at three factors:
- Importance: What is the value of solving the problem the charity is addressing?
- Tractability: How hard is it to make an impact on this problem?
- Neglectedness: To what extent is this problem already well-funded?
When we’re evaluating specific charities, we have three more considerations:
- Right-sizing: Is the scope of a charity's operations too large (or small) for donations to have a high marginal impact?
- Administrative overhead: Have charity evaluation services identified glaring imbalances in administrative versus operational spending?
- Reporting and documentation: To what extent has the charity evaluated the impact of its projects?
Yet one of the biggest considerations is to ensure their values are aligned with the organization of their choice. The most meaningful impact is the one made alongside others who share the same vision.
Flores told me, “I can’t imagine doing my job if I didn’t have the capability to enable clients to align their wealth with their values in a charitable structure that not only can further the social, environmental, and financial returns of that charitable pool of capital – but then the grant-making that follows – well, to me that’s why we all do this work.”
Interested in helping your clients navigate a DAF that will create the most meaningful impact? Our Ethic team can help you assess investment opportunities while advising you on how to find the causes and needs that align with your unique charitable interests. Reach out to your relationship manager or firstname.lastname@example.org.
Ethic Inc. is a Registered Investment Adviser located in New York, NY. Registration of an investment adviser does not imply any level of skill or training. Information pertaining to Ethic Inc’s registration or to obtain a copy of Ethic Inc.’s current written disclosure statement discussing Ethic Inc.’s business operations, services and fees is available on the SEC’s Investment Adviser Public Information website –www.adviserinfo.sec.gov or from Ethic Inc. upon written request at email@example.com. Information provided herein is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Any subsequent, direct communication by Ethic Inc. with a prospective client shall be conducted by a representative of Ethic Inc. that is either registered or qualifies for an exemption or exclusion from registration in the state where a prospective client resides. Information contained herein may be carefully compiled from third-party sources that Ethic Inc. believes to be reliable, but Ethic Inc. cannot guarantee the accuracy of any third-party information.
Ethic Inc. does not render any legal, accounting, or tax advice. Ethic Inc. recommends all investors seek out the services of competent professionals in any of the aforementioned areas. Ethic Inc. cannot provide any assurances that any investment strategies, simulations, etc. will perform as described in our materials. ALL INVESTMENTS INVOLVE RISK, ARE NOT GUARANTEED, AND MAY LOSE VALUE. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY.
This material includes commentary from Caprock which is a client of Ethic Inc. No direct or indirect compensation was provided for Caprock's participation in the creation of this material. There are no known conflicts of interest resulting from Ethic Inc.’s relationship with Caprock.