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Donor-Advised Funds Can Play a Major Role in Your Charitable Planning

Philip GagliardiOctober 30, 2015

Financial Planning

One of the hottest methods for charitable giving right now is through donor-advised funds, a tax-smart vehicle offered by a public charity that allows donors to make contributions to the charity, become eligible to take an immediate tax deduction, and then make recommendations for distributing the funds to qualified public charities.

Back in 2013, contributions to donor-advised funds grew 23.5 percent, or $17.3 billion. This brought their assets to $53.7 billion, according to the National Philanthropic Trust. That growth handily outpaced all other giving vehicles, like private foundations and charitable trusts, as well as the 4.4 percent growth in overall giving. Contributions to donor-advised funds now represent 7 percent of all individual charitable donations.

Donor Advised Funds provide a number of benefits that direct donations to a charity may not, including:

  • Ability to accept and process appreciated securities in which the donor does not have to pay capital gains tax.
  • Variety of investment options allowing the contribution to potentially grow over time.
  • Capacity to receive one block of securities that can benefit multiple charities.
  • Creation of a legacy versus providing a one-time gift.
  • Separation of tax planning and charitable giving; donor receives tax deduction when contribution is made, but grants to charity can be made later.

When individuals are contemplating giving money to charities, creating a private foundation seems to be the go-to choice. But for most people it may not be the most effective option. Starting a private foundation can involve substantial startup costs and administrative expenses, such as the yearly filling of a Form 990-PF. But one of the most important differences is that Donor Advised Funds receive more favorable tax treatment than a private foundation. Donor- Advised Funds allow donors to take a greater federal income tax deduction up to 50 percent of adjusted gross income (AGI) for cash contributions and up to 30 percent of adjusted gross income (AGI) for appreciated securities; versus 30 percent of AGI for cash contributions and 20 percent of AGI for appreciated securities for a private foundation. Donor-Advised Funds also offer the ability to recommend grants anonymously, if desired. It is also possible to convert a foundation over to a donor-advised fund to simplify ongoing maintenance and record keeping.

Consider these powerful advantages:

  • Immediate Tax Deductions: Cash gifts can be deducted at 50 percent of adjusted gross income (AGI); appreciated asset gifts are deducted off their market value at 30 percent of AGI Moreover, unused deductions can be carried forward an additional five tax years.
  • Avoiding Capital Gains Tax: Full market value for the asset is realized by the granter as a gift and the donor-advised fund sells the asset without capital gains tax. Win, win!
  • Avoiding Estate Tax: Donor-advised funds are held in the name of the charity that sponsors them so they are not subject to estate taxes. Taxable estates can be reduced during the life of the granters, or gifts can be transferred after death.
  • Accounts Grow Tax-Free: Like private foundations, donor-advised funds create a multigenerational model for future family gifting that grows free of taxes.
  • Reduce small- and family-business or highly appreciated real estate taxation upon sale: Over 70 percent of small businesses are S-Corporations, which will be sold as the retiree makes a transition into retirement, creating large taxable events in years just prior to retirement. Partnerships and LLCs often work out the same way. Appreciated real estate is held due to concerns of creating a large taxable event. Donor-advised funds can take the sting out of excessive taxation when retirement or sale of low-cost property occurs. Take note: These sales can create UBIT (Unrelated Business Income Tax), which can be reduced by utilizing advanced donor-advised fund planning.
  • Bequests: The most popular reason that retirees use donor- advised funds is because they have a charitable nature and would like to simplify their philanthropic strategy. Donor-advised funds can be created during life and funded at death with life insurance or other estate assets. Middle Americans can create a charitable legacy that can be managed by heirs after their demise, which can be distributed to numerous charities instead of just one or two that their trusted financial counselors can stay involved with and that will ensure that their charitable intent will go forward over multiple generations.

This article covers the highlights of this subject and should not be construed as tax planning advice. For more information, please contact our office (610-651-2777).

Sources:

  1. The Pros and Cons of Donor Advised Funds
  2. Donor Advised Funds