Article: Tax Planning with Donor Advised Funds

As the end of the year approaches, many clients want to know how to maximize their charitable giving, but may not have selected specific charities to receive such gifts. A great compromise is to use a Donor Advised Fund, which allows donors to time their contribution while deferring the decision on the charity or charities that will receive the ultimate gifts.

A typical transaction with a Donor Advised Fund looks something like this:

  • Client establishes a Donor Advised Fund and makes an initial gift. Gifts can be made from cash, real or tangible property, or appreciated securities. Using appreciated securities or real estate gives the best benefit, as the donor then does not need to pay any capital gains on the appreciation of the security or other capital asset.
  • The Donor Advised Fund may liquidate the contributed property, without paying any capital gains tax if applicable, and then the Donor Advised Fund can invest the contributed property. The donor may be able to advise on investments, or the investments may be handled solely by the Donor Advised Fund.
  • The donor receives a tax deduction at the time the donation is irrevocably made to the Donor Advised Fund, allowing the donor to time the deduction for tax purposes.
  • The donor can then recommend gifts from their Donor Advised Fund to other 501(c)(3) charitable, educational, religious, etc. organizations from time to time. If the investments in the Donor Advised Fund increase in value, the donor may even be able to give more than the amount originally contributed.
  • The donor can make additional contributions in the future to their Donor Advised Fund, as desired.

Creating a Donor Advised Fund is fairly straightforward. Most charities that manage Donor Advised Funds have a minimum of $5,000 - $10,000 for the initial donation, and then may allow smaller donations in the future. Benefits of using a Donor Advised Fund include:

  • Ability to time tax deduction.
  • Ability to make a larger donation in a specific tax year, and make smaller or no donations in other tax years, better alining donations with tax deductions, and making better use of itemizing deductions.
  • Single gift of appreciated securities, real estate, etc. can be made to the Donor Advised Fund and then easily granted out to other charities, rather than having to coordinate with many charities on donations of appreciated capital assets.
  • Grants from the Donor Advised Fund to the final charities can be made anonymously, so that your $50.00 gift to "Save the Whales" doesn’t result in $45.00 being spent on tote bags and mailers asking you to make additional contributions to save more whales.

Options for Donor Advised Funds include:

Note that while individuals over the age of 70 1/2 can make a distribution from their taxable retirement account (e.g. 401(k)) directly to a public charity to meet their Required Minimum Distribution (RMD), without recognizing any income tax on the withdrawal, direct donations to a Donor Advised Fund from a taxable retirement account are not available. However, individuals can take a distribution from their taxable retirement account to satisfy RMDs and then subsequently donate to a Donor Advised Fund, subject to the limitations on charitable deductions on their Schedule A.

Contact us if you would like to discuss using a Donor Advised Fund or other tax planning strategies for your business or for you personally. November and early December are the best times to discuss tax planning, as many tax planning tools are only available if utilized by December 31st.

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