The New Wave in Charitable Giving
by Tom Rueger, CFP®
Donor-advised funds have become increasingly popular as a way to make charitable donations. In 2016 alone, more than $23 billion was contributed to donor-advised funds. Now, with the deduction for charitable contributions surviving the 2018 income tax changes, donor-advised funds will become even more popular. This is because the standard deduction has nearly doubled ($24K for Married filing jointly) and many components of the standard deduction are either being capped or eliminated (most notably the deduction for state and local taxes is being capped at $10K). As a result, many people will have the tax benefit of their charitable gifts either reduced or eliminated by the larger standard deduction.
Therefore, there is more reason to employ the strategy of “bunching” or “front loading” your charitable gifts for multiple years into one tax year instead of losing some or all of the tax benefit as a part of the increased standard deduction each year.
So, what exactly is a donor-advised fund? A donor-advised fund is a philanthropic portfolio (a separately identified account at a sponsoring organization) that allows a donor to:
- make an irrevocable charitable donation into the donor-advised fund;
- receive an immediate tax deduction for the entire amount donated;
- name the fund as the donor chooses;
- direct the investment of the assets in the account and receive tax free growth;
- choose multiple or successor advisors;
- recommend grants (donations) from the assets in the fund to recognized charities at any time the donor chooses (usually done through user friendly web applications).
For example: Ms. Smith can contribute $50,00 to a donor-advised fund today; receive an immediate tax deduction of $50,000 for the gift; name the account The Smith Family Charitable Fund (or any name she chooses); choose the investments for the funds; and, direct that grants be made whenever and in whatever amount she chooses (with some dollar amount restrictions imposed by the sponsoring organization).
In addition, donor-advised funds are generally very flexible in terms of the type of assets they will accept: cash, stocks, bonds, mutual fund shares, restricted stock, real estate, and more. Typically, the best asset to donate is long-term appreciated securities in kind because any capital gains tax is avoided on the securities and the full market value of the securities donated can be deducted.
Some questions to ask when choosing a donor-advised fund are:
- What are the minimum initial investments and what are the minimum additional contribution amounts?
- How high are the ongoing administrative fees?
- How high are the fees for the underlying investments?
- Is the lineup of available investments good enough that you can build a well-diversified portfolio that matches your time horizon?
A few things that one cannot use a donor-advised fund grant (donation) for:
- To sponsor a table or event tickets because the donor receives some benefit or goods/services in exchange.
- To satisfy a pledge because you receive a release of an obligation in return.
I would encourage you to speak to your Relationship Manager today about how a Donor Advised Fund may help you with managing your charitable donations and reducing your tax liability!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and/or opinions are revealed, this post is not intended to, nor does it represent or reflect transactions or activity specific to any one account. Vantage Financial is not a Tax Advisor. For tax related issues it is important that you review all recommendations with your tax advisor or accountant.