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Fred Kaynor

Financial Planning > Charitable Giving

Tax Breaks Now, Charitable Gifts Later: What to Know About Donor-Advised Funds

By Jane Wollman Rusoff

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“Charitable planning is becoming more and more an area of interest to donors as part of their overall financial planning,” Fred Kaynor, managing director of relationship management, marketing and partnerships at Schwab Charitable, tells ThinkAdvisor in an interview.

The fastest growing charitable-giving vehicle in the U.S. is the donor-advised fund. Introduced in the 1930s, it wasn’t until some 60 years later that it began to pick up speed.

Schwab Charitable is one of the largest providers of DAFs in the country. In 2022, its donors increased grants to charity by 7% over 2021, to more than $4.7 billion, representing a record 995,000 grants.

Kaynor leads Schwab Charitable’s team that works with donors, financial advisors and the charities.

“2022 was our year to shine. Market volatility was up, and economic uncertainty was rampant, [but] our donors gave more to charity [through DAFs] than they did the previous year because there was a great need,” he says.

They had already transferred those assets to DAF accounts when the market was strong, notes Kaynor, winner of a 2022 ThinkAdvisor LUMINAIRIES award in the category of community impact.

In the interview, he sheds light on the differences between a DAF and a private foundation. Some folks have both, he notes.

DAFs owe their popularity to being “a very easy, low-cost, tax-smart, straightforward solution” to charitable giving, according to Kaynor.

A tax deduction, based on asset value, is made at the time a contribution is deposited into the donor’s DAF account.

DAFs avoid capital gains taxes that would have been incurred if the donor had sold the assets first then donated the proceeds.

Once the assets are in a DAF, they are liquidated and invested for growth. The donor decides which charity receives the grant and when.

Every DAF contribution is an immediate and irrevocable gift to charity.

In financial services for more than 25 years, Kaynor was previously in senior posts at Mastercard and Visa.

ThinkAdvisor recently interviewed the manager, who was speaking by phone from Schwab headquarters in San Francisco.

He explains that although private foundations offer more “flexibility, they tend to be more expensive to administer [with] a variety of … costs that don’t exist for DAFs.”

Here are excerpts from our interview:

THINKADVISOR: Why was 2022 such a good year for donor-advised funds, and in particular, for Schwab Charitable?

FRED KAYNOR: 2022 was our year to shine. Market volatility was up, and economic uncertainty was rampant.

But there were plenty of assets in people’s DAF accounts irrespective of what was happening in the market and economy. That didn’t impact how much they gave.

They had contributed their assets when they had them to give — when the market was strong, when their stock was performing at a very high level.

That’s when they put assets in their DAF accounts, and we invested them on their behalf for growth.

Our donors gave more to charity than they did the previous year because the need [for charity donations] had grown, and they gave with maximum impact.

Why are DAFs so popular with both donors and financial advisors who support them?

It’s an investment account for charitable giving — a very easy, low-cost, tax-smart, straightforward solution.

A lot of people have turned to this [vehicle] because they want a very tax-efficient, easy way to maximize their philanthropic impact.

They also want a mechanism that they can use not only to fulfill their short-term philanthropic goals but their long-term ones as well [via investing] the assets for growth.

In what way are DAFs tax efficient?

Donors receive a tax deduction at the time they make their contribution [into the DAF account], based on its value.

So the donor avoids capital gains that they would otherwise incur if they were to sell the assets first and then donate the proceeds.

This can mean up to 20% more that’s available to go to charity.

How is charitable planning a part of financial planning?

We hear, on an ongoing basis, that charitable planning is becoming more and more an area of interest to donors as part of their overall financial planning.

We have a team of charitable [-giving] consultants who partner with advisors to provide tools and resources that enable them to start client conversations related to philanthropy.

Frequently, these advisors engage with us on a very extensive level; oftentimes [the consultants are even brought in] when the [financial advisors] have client consultations about anything related to philanthropy and charitable giving.

What are the specific steps needed to make a DAF donation?

It’s very easy. The client contributes [moves to their DAF account] cash or noncash assets, like publicly traded stocks or real estate. We liquidate those assets at the time they’re donated and then immediately deposit the proceeds into the donor’s account.

The donor receives a tax deduction for the value of whatever assets they choose to contribute.

Is there any downside?

The contribution is an immediate, irrevocable gift to a charity [which they may designate later]. They relinquish control of the assets, but they can make recommendations for how they’re invested, and they ultimately, [identify] the charities for those grants.

Is it easier if the client already has a Schwab investment account?

The DAF account sits right next to their other Schwab accounts. So all the donor has to do is click a couple of buttons and pull the assets from their existing Schwab account. Then they indicate where the assets are to be directed, and the grant is processed pretty much immediately.

Of course, the donor’s brokerage account can be anywhere they prefer, not necessarily at Schwab.

Tell me more about investing the donated assets.

Once the assets have been liquidated and the proceeds deposited into the account, they’re invested in a variety of different ways for potential growth.

The investments can be managed by Schwab Charitable, but we also work with over 3,500 advisors who manage the accounts on a donor’s behalf.

[Alternatively], the advisor who has a relationship with the client can manage the account. They frequently tell their clients, “We can help you mitigate tax exposure and maximize your philanthropic impact with a donor-advised fund.”

They’ll review it with them as a potential option. Then they can open the account and manage it.

What are Schwab Charitable’s relationships with the charities?

We have a database of about 2 million 501(c)(3) charities that are all in good standing with the IRS.

We help them with their fundraising and development to make sure they’re choosing tools to promote the fact that they happily accept gifts from donor-advised funds in addition to cash, checks, stocks and so forth.

We provide the charities with resources, best practices, [and] a widget they can put on their website that takes people [where they can] make a donor-advised fund [grant].

Please contrast a DAF with a private foundation.

There are certain things donors prefer to do with a private foundation that they can’t necessarily do with DAF and vice versa. So, frequently, people have both.

There’s generally more latitude and flexibility with a private foundation. But they tend to be more expensive to administer: There’s overhead, salaries and a variety of other costs that don’t exist for DAFs.

Foundations typically have staff that are family members managing the foundation. With a DAF, there isn’t any such opportunity.

DAF donors can’t do anything that would afford the donor direct benefit. For instance, through a private foundation, donors can give [assets] for a child’s or grandchild’s scholarship. They can’t do that with a DAF.

Also, there are tax deductibility limits that differ between a donor-advised fund [up to 60% of adjusted gross income] and a private foundation.

Any more differences?

DAFs afford donors the opportunity to give anonymously, whereas, with a private foundation, that information is available publicly.

A very small amount — about 4% — of our donors choose to give on an anonymous basis.

It’s not so much to avoid solicitations, but they don’t want recognition for their gifts. They don’t want to be anything more than generous with their philanthropic resources.

So they choose by design to give in a manner that maintains their anonymity but still allows them to be incredibly generous.

In addition to your DAF platform, do you liaise with the nonprofit sector?

We work with a lot of leaders there to develop or source educational tools and resources that we can offer to our financial advisors and their clients so they’re as informed about how we manage philanthropy as much as possible.

For example, we partnered extensively with Stanford University and co-hosted a series of podcasts and webinars with them and other leaders in the philanthropic sector about areas particularly relevant to donors and financial advisors.

One webinar was about how DAFs can be added and be helpful to the development efforts of St. Jude’s fundraising arm.

All in all, we’re trying to bring more relevant information to our donors and financial advisors to help them embrace the right approach to philanthropy.

Pictured: Fred Kaynor

Jane Wollman Rusoff

@jrusoff2

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