What if you could make a greater impact on the causes you care most about?
If charitable giving is important to you, consider using a donor-advised fund. A donor-advised fund can help you accomplish your philanthropic goals and can be more beneficial than giving directly to a charity.
These charitable giving funds are an excellent way to simplify and facilitate your charitable donations, as well as provide you with unique tax advantages.
What is a donor-advised fund?
A donor-advised fund (or charitable gift fund) is an investment account used exclusively for charitable giving. These funds are created or sponsored by a qualified charitable organization. Many major financial custodians have also formed charitable corporations to offer these donor-advised funds as well.
Contributions made to a donor-advised fund can be invested and grow tax-free. Better yet, contributions to the fund may also provide you with an immediate income tax deduction. As the account owner, you direct grants to be paid out to the charities that you love and support most. These grants may even be paid out to multiple charities throughout the year and well into the future.
A contribution to a donor-advised fund is irrevocable, meaning that once a contribution is made, it cannot be rescinded. However, the donor still retains advisory privileges including the distribution of funds and the investment of assets in the account.
As donor-advised funds provide several tax advantages, they are regulated by the Internal Revenue Service. However, they are subject to much less stringent tax laws and regulations than other charitable vehicles, including private foundations and charitable trusts, making them a very popular alternative.
What are some benefits of a donor-advised fund?
- Any funds invested in the account have the potential to grow tax-free, providing you with even more capital for grantmaking
- Contributions to the fund count as a charitable donation for the current tax year
- You can avoid paying capital gains taxes on contributed assets such as stocks, which may have appreciated in value over time
- There is no annual giving requirement, and you have discretion as to when the funds are paid out to charities
What are some drawbacks of a donor-advised fund?
- Certain donor-advised funds have minimum requirements, including initial contribution minimums, grant minimums, or administrative fee minimums
- The investments in the fund can be subject to the risks of market down-turns
- To receive an income tax deduction for the contribution, you must itemize deductions on your tax return
Why should you consider a donor-advised fund?
Donor-advised funds have become increasingly popular over the past several years as they are viewed to be a cost-effective and tax-efficient solution for managing charitable donations. The tax law changes brought about by the Tax Cuts and Jobs Act of 2017 contributed to this increase as well, since the new law resulted in fewer taxpayers benefitting from their charitable gifts due to the increase in the standard deduction.
To help maximize deductions, taxpayers started bunching together two or more years’ worth of charitable contributions into one single tax year. This way, they would be eligible to itemize their deductions on their tax return and benefit from making charitable contributions once again. The funds could then be distributed as non-deductible grants over several years, allowing them to continue to support their favorite charities on an annual basis.
While donor-advised funds offer several tax benefits from deductions to tax-free growth, they also offer some unique philanthropic benefits as well. If leaving a lasting legacy is important to you, a donor-advised fund allows you to get your family involved, including opening the fund to additional donations from them and continue to have your charitable wishes fulfilled.
A successor can be named on the account who can make grants based on your charitable intent long after you pass. You can name any person to take over, including your children, grandchildren, a sibling, or a friend. A donor-advised fund can even be named as a beneficiary on many assets, including retirement accounts and life insurance policies, allowing you to create that charitable legacy for yourself.
What assets can you contribute?
Donor-advised funds may accept contributions in the form of cash or public securities. Some funds may even accept non-public assets such as real estate, private business interests, life insurance, and Bitcoin.
Depending on the type of asset contributed, there may be a limit on the amount you can claim as a tax deduction in any given year. For instance, you can only deduct the value of the cash contribution that does not exceed 60 percent of your adjusted gross income (“AGI”) for the current year. If your contribution exceeds this threshold, that’s not to say you won’t get the full benefit. Charitable contributions that cannot be deducted in a tax year due to limitations may be carried forward for up to five additional years.
On the other hand, a contribution of public securities or other assets may only be deductible up to 30 percent of your AGI. While a contribution of appreciated securities has a lower deductibility threshold than cash, that’s not to say it’s less preferable – in fact, it’s quite the opposite!
Contributing highly appreciated stock not only allows you to receive a tax deduction for the fair market value of the contribution, but it also lets you avoid having to pay capital gains taxes on the stock. This is a rare two-for-one opportunity granted by the IRS that makes donations of highly appreciated assets quite valuable.
Major changes coming soon?
The rules surrounding donor-advised funds may be changing soon thanks to two separate bills recently introduced in Congress. These bills, known as the “Accelerating Charitable Efforts Act,” would modify existing rules for donor-advised funds by imposing payout deadlines and changes to the tax deductibility of contributions.
The bills would create two new types of donor-advised funds. The first would allow for an immediate tax deduction in the year a contribution is made but would require that the contribution be paid out to qualifying charities within 15 years. The second would only allow for a tax deduction when the property is distributed to the qualifying charity, but the assets can remain in the fund for up to 50 years.
As with any proposed legislation, there is no way of knowing whether these changes (or some form of them) will actually be enacted. However, it’s a good idea to take these proposals into consideration now as they could impact your charitable giving strategies.
Is a donor-advised fund right for you?
A donor-advised fund can help carry out your charitable goals. These funds can provide you with tax benefits, flexibility in supporting the charities you love, and the chance to leave a charitable legacy.
If charitable giving is important to you, consider reaching out to a Wealth Advisor who can help determine if a donor-advised fund makes sense for you. Our advisors at Domani Wealth are always available to start a conversation, and you can get in touch with us by calling 855-855-5455 or emailing [email protected].