By Mallon FitzPatrick and Victoria Jung
November 21, 2022 – Mackenzie Scott is back in the news after donating $84.5 million to the Girl Scouts of the USA. Scott primarily donates through a vehicle called a donor advised fund (DAF). Though there are multiple strategies to help execute a charitable program, the DAF has grown increasingly popular with the casual donor, intentionally charitable, and the ultrawealthy philanthropist. Large donations from billionaires such as Mackenzie Scott, Elon Musk, Mark Zuckerberg, and Jack Dorsey, to name a few, are made through DAFs.
Why are billionaires using DAFs instead of using a private foundation? DAFs are relatively easy to set up with little to no upfront cost. Private foundations are more complex and require more time and cost to create; however neither of these factors are prohibitive. Donating through a DAF qualifies for an income tax deduction of up to 60% of AGI for cash and 30% for stocks or real property. Private foundation donations are deductible to a lesser extent, 30% of AGI for cash and 20% stock.
The assets contributed to a DAF provide for an immediate tax deduction and the DAF can hold the assets until the donor wishes to give to charity. This is especially advantageous for wealthy individuals who believe they will give to charity in the future, but do not have specific plans, and want a tax deduction today. A good strategy and one employed by billionaires with concentrated holdings in their companies is to donate stock that has appreciated highly and avoid paying capital gains tax. Elon Musk donated $5.7 billion worth of Tesla stock to a DAF in 2021. Scott received an estimated 19.7 million Amazon shares as part of her 2019 divorce settlement with Jeff Bezos. The former wife of the Amazon founder subsequently opened DAFs with three sponsoring institutions to help execute her philanthropic plans.
DAFs are not required to distribute funds to charities in any timeframe, whereas private foundations must distribute 5% of assets each year. The ability to keep assets within a DAF is a feature that many public charities, that benefit from these funds, find frustrating. Some public charities also disagree with the anonymous nature of DAFs. There are no requirements to report the donor’s name to the DAF or the charities that subsequently receive distributions from the vehicle. DAFs are not held to oversight that would prevent potential self-dealing, but Private foundations face IRS scrutiny through excise tax.
DAF rules do not require transparency; however, Mackenzie Scott publicly discloses much of her giving. According to the New York Times, Scott has donated $12.8 billion to over 1,200 organizations. Her transparency is likely an outlier within the DAF universe. It is probable that much of the money within these vehicles remain captive and that charitable groups are not benefiting from the donations.
A recent bipartisan act called Accelerating Charitable Efforts (ACE) may soon change the distribution feature of DAFs. The purpose of the ACE act is to motivate donors to distribute funds to public charities in a timely manner using tax incentives. The tax benefits received by the donor would depend on the velocity, amount, and speed of the distributions made to public charities. The ACE act may help mitigate some frustrations around the lack of DAF distribution rules. However, it is unclear if the act will change the anonymity features likely coveted by large donors.
The ACE act is not likely to be enforced any time soon and the DAF remains a powerful vehicle for donating to charity with benefits for the casual, intentional, and mega donor. Please feel free to reach out to your Wealth Manager if you are charitably inclined and are interested in learning if the DAF is appropriate for your plans…or lack of plans!
Sources:
https://www.barrons.com/articles/ten-u-s-mega-donors-gave-a-total-of-15-billion-in-2021-01655934593
https://www.nptrust.org/donor-advised-funds/daf-vs-foundation/
https://pingree.house.gov/news/documentsingle.aspx?DocumentID=3965
https://time.com/6148841/elon-musk-donation/
https://www.nytimes.com/2022/03/23/business/mackenzie-scott-philanthropy.html