05/22/2024 | Press release | Archived content
May 22, 2024
For the philanthropically minded, the charitable trust has long been a sound strategy for setting aside substantial funding for a charity. A charitable trust allows for both private and charitable interests. A charitable remainder trust (CRT) is a permanent financial arrangement. The grantor transfers assets to the trust, which pays an annual income to lifetime beneficiaries, typically the grantor and/or spouse. The trust may continue for a specific term of years (up to 20), or it may last for the joint lives of the income beneficiaries. When the trust terminates, the assets pass to a designated charity. An income tax deduction for the actuarial value of the remainder interest is permitted when the contribution is made to the trust.
A charitable lead trust flips the picture, providing an income stream to a designated charity for a specified number of years, and then the assets themselves return to the family when the trust terminates.
An alternative approach to setting aside money for charity, short of an outright gift, is a contribution to a donor-advised fund or DAF. The DAF holds the funds and accepts suggestions in the future from the donor for making grants, but is not legally required to follow those suggestions. The donor irrevocably parts with the contribution to be able to secure the charitable deduction. However, as a practical matter, the DAF is likely to accept the donor's advice in most cases.
DAFs have become big business. According to a 2023 report by National Philanthropic Trust, nearly 2 million DAFs were holding $229 billion in assets in 2022. That year DAFs received $86 billion in new money, and they distributed about $52 billion in grants.
Concerns
Some members of Congress have expressed concerns about the timing mismatch between when the taxpayer gets the charitable deduction (upon funding the DAF) and when the charities receive the money (when future grants are made). The IRS issued proposed Regulations on DAFs in November 2023, and it has received hundreds of comments in response.
To provide factual information about this strategy, the DAF Research Collaborative conducted an extensive study of DAF practices over a period of years, with findings published at https://johnsoncenter.org/wp-content/uploads/2024/02/DAFRC_Report.pdf. They learned:
• Half of all DAFs had total assets of less than $50,000, and only 7% had $1 million or more.
• The median payout of DAFs was 15%, and the average payout was 18%.
• Some 97% of DAFs are advised by individuals or families; 49% of advisors were baby boomers.
• About 54% of DAFs granted out half of their original contribution within three years.
• About 58% of DAFs had granted out 100% of their original contribution within eight years.
• The DAF is a mid-range philanthropic strategy: 38% of contributions were from $10,000 to $49,999; 15% were from $50,000 to $99,999; and 19% were from
$100,000 to $499,999.
Are you interested in becoming a philanthropist? We'd be pleased to offer our insights in this area.
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