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A new Trend In Donor Finance: The Individual Giving Account

A new Trend In Donor Finance: The Individual Giving Account

A new financial vehicle for giving has emerged among tax-conscious Philanthropists. It’s called the Individual Giving Account and it allows Donors to immediately harvest the tax benefit of donation deductions while stashing away assets earmarked for contribution at a later time. Think of it as an IRA set up to handle a donor’s philanthropic ‘investments’. Writing about the visible proliferation of these new accounts, Wall Street Journal Contributor Laura Saunders provides an excellent example of how they work:

Say Mary usually gives away about $15,000 a year, and she has stock valued at $45,000 that she acquired for $10,000 and has held for more than a year.  She’s worried both that the stock will drop and that tax changes next year could lower her deduction’s value.

Rather than writing checks to her favourite causes this year,  Mary contributes the stock to a donor advised fund.  She gets a deductions for the full $45,000 for 2016 and bypasses capital-gains tax on the stock’s growth.

Then the sponsor (such as [Charles] Schwab) immediately sells Mary’s stock, tax-free, and funds her giving account with the $45,000.  If she wants to give,  Say, $3000 to a qualified non-profit such as her church or college, she asks the sponsor to make a grant, and it typically does, taking care of all paperwork, meanwhile, the remainder is invested as she directs in a menu of mutual funds, awaiting her decisions about whom to give to and how much.

The result, Mary has made a tax-efficient donation of stock and gotten a full deduction this year, no matter what happens to the market or the tax code next year, meanwhile, she doesn’t have to parcel out three years’ worth of donations until she wants to (see Wall Street Journal article mentioned below)

Non-profit directors are right to conclude that anticipated changes to the tax-code enormously influence the giving behavior of donors in the upper crust.  Proposals by the new Republican administration to curtail the value of charitable deductions – either by directly limiting the allowed deductible amount, or by reducing the tax rate itself have driven charitable actors to open swaths of IGAs, also known as donor- advised funds.  The number of people with giving accounts now exceeds 270,000 and during the five year time period ending in 2015, annual contributions to the accounts doubled to $224 billion from $10.4 billion according to data from the National Philanthropic Trust.  As noted in the above example, the accounts and the various stocks and bonds contained within them are managed by a third party such as Fidelity, Vanguard, or Charles Schwab.

Given that these new-fangled accounts are exploding in popularity and have become an alternative to private foundations for the wealthy non-profit directors would be wise to target some of their holders through their fundraising efforts. An important caveat with regard to? donor-advised funds is that once money is deposited, it cannot be withdrawn.  That means that these donors have a different source? of mindset than ordinary retail donors who must choose where to?  dip into their checking or savings account in order to make a gift.  Well-heeled philanthropists who possess well-funded giving accounts have already made the decision to contribute a certain amount and so the only question left is where the donation will go.  Quite likely, they will be receptive to a number of causes and non-profits.  At Vanguard in 2015. 29% of grants went to educational causes, 21% to human services, 13% to religious groups, and only 1% to historical causes.

Non-profits would do well to study up on this new preferred philanthropic financial structure for the affluent. If nothing else, directors could educate their own donors about the flexibility and tax efficiency of the new and exciting Individual Giving Account.



Charity Accounts: Holiday Must – Have by Laura Saunders, The Wall Street Journal, December 24-25, 2016