A Better Way to Give

As I have become more immersed in financial planning and philanthropy circles over the last few years, the topic of donor-advised funds (DAFs) has come up repeatedly. It’s no surprise—their popularity has soared in recent decades. Between 2012 and 2022 alone, annual contributions rose by a staggering 512%, reaching $85.53 billion, far outpacing the 64% growth seen in overall charitable giving.

The appeal of DAFs is clear. They offer flexibility in separating the what, when, and where of charitable giving. Donors receive an immediate tax deduction and then later recommend grants of those funds (which can grow tax free) to qualified nonprofits. In windfall situations—such as an inheritance, business sale, or strong market return—DAFs are an incredibly convenient and effective strategy to reduce a tax burden. 

For cash and securities, DAFs are brilliant. But for tangible assets like art and collectibles, DAFs come with serious limitations. Not only is there the challenge of selling the asset, which needs to be liquidated so the DAF account can be funded. There are also restrictions on the tax deduction, which is capped at the lesser of the cost basis (i.e. what the asset was purchased for originally) or fair market value (i.e. what it would sell for today). 

On the other hand, If that same asset were gifted directly to a nonprofit organization that could use it in a way related to its exempt purpose or function—like an artwork at a museum—it would constitute "related use" and qualify for the full fair market value deduction. This might not seem like a big deal, but in the case of a long-term appreciated asset like art, it certainly can be. 

The difference? An additional $277,500 in tax savings from the donation of a $1 million painting in the below example. 

Let’s break down the numbers across three different giving strategies to understand why. In all scenarios, we assume a cost basis of $250,000, long-term capital gains tax of 31.8%, and income tax rate of 37%. 

Comparison of giving strategies.

In the first scenario, if the owner were to sell the painting and donate the proceeds, the charity would receive $711,500 cash and the donor would benefit from an estimated tax saving of $24,755, after claiming a tax deduction of $711,500 and paying capital gains tax. 

In the second scenario, if the owner were to donate the painting to a DAF and grant the proceeds to a charity, the charity would receive $950,000 cash and the donor would benefit from an estimated tax saving of $92,500, after claiming a tax deduction of $250,000 and forgoing capital gains tax. 

Now, in the third scenario, if the owner were to donate the painting to a museum, the charity would receive a $1,000,000 artwork and the donor would benefit from an estimated tax saving of $370,000, after claiming a tax deduction of $1 million. 

Which would you choose? It’s obvious, and that’s saying nothing of the fact that the painting can go on view at a museum and be enjoyed by the public for years to come, while the donor’s generosity (and legacy) can be acknowledged in the accompanying credit line. 

So why aren’t more philanthropy and financial advisors talking to their clients about donating art to museums or other organizations that can qualify for “related use” like hospitals and universities? It could be because, until recently, they lacked the infrastructure to make those gifts so it was never really a possibility. But Museum Exchange has changed that. 

How do you efficiently match artworks with appropriate institutions? How do you seamlessly manage the appraisal and transfer process? These are the practical considerations that kept advisors defaulting to the "liquidate first" DAF approach, even in cases when they recognized that a direct donation might better serve their clients. 

I am not advocating for abandoning DAFs—they remain an excellent solution in many situations, and sometimes even for art, such as if a donor is looking for creative ways to support a museum financially. But now that Museum Exchange has made donating art easy, donors and their advisors have another option. The question becomes: what is the optimal strategy given the donor’s charitable goals and individual tax circumstances? If the answer is donating to a public institution where the artwork can continue to invite, inspire, and illuminate, we’d be only too happy to help realize that outcome.

DISCLAIMER

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be a specific offer by Museum Exchange or any affiliate to sell or provide. 

Museum Exchange does not provide legal or tax advice. Please consult with your legal or tax advisor to properly determine your specific consequences from making a charitable gift through Museum Exchange.