What if you could enjoy many of a private foundation’s benefits for how you manage your philanthropy, but with even better tax benefits? What if you could establish a single planned giving tool, but have it benefit multiple organizations – and then make changes without involving a lawyer?
While the ease-of-use and flexibility of donor-advised funds make using them very simple, it is often the tax benefits that initially spark people to start an account. Below, we’ll look at why the tax benefits of a donor-advised account are so attractive and also how a donor-advised account can helpfully combine with other estate planning vehicles.
3) Tax benefits that can’t be beat
Organizations that offer donor-advised funds are public charities. That means, with a few limited exceptions, all donations to a donor-advised account have the same tax benefits as giving to any other 501(c)(3) public charity. What are some of those benefits?
- Take a deduction of up to 50% of adjusted gross income (AGI) when contributing cash. With a private foundation, you are limited to 30%.
- For gifts of appreciated stock, appreciated property, or closely held securities, you can deduct 30% of your AGI, compared to 20% for a private foundation.
- Avoid capital gains taxes when contributing appreciated stocks while taking a deduction of the full value of the stock. You can give 100% of the gain to charity, avoiding the government’s cut.
- Grow charitable dollars tax-free by investing some or all the funds in your donor-advised account. Use the growth to make an even greater charitable impact later.
- Take a tax deduction in one year and make your charitable giving decisions over time. This is valuable for managing the tax consequences of an unexpected end-of-year windfall.
Any donor-advised fund provider can offer the same assortment of tax benefits. The tax advantages, then, are rightfully often a way to compare donor-advised funds against other charitable vehicles, such as a private foundation, rather than as a way to measure fund providers against each other. When selecting a provider, go beyond the tax element to look at such things as principles and mission.
4) DAFs conveniently complement other charitable vehicles
Speaking of other ways to give, while the tax benefits of a DAF can make it appealing in and of itself, those same benefits coupled with the ease of use make it a strong complement to other tools such as charitable remainder trusts (CRT), charitable lead trusts (CLT), and even private foundations.
A donor-advised fund allows donors to streamline charitable giving that is part of one’s estate plan by offering a single destination for bequest funds. A donor-advised account can also serve as the charitable beneficiary of a CRT or CLT. The charitable funds put into the donor-advised account can then be directed out, either by a successor adviser or a pre-determined donor intent plan, to any number of charitable organizations over many years.
CRT and CLT transactions are more complicated, so let’s take an example of a bequest gift to see the benefits of what we’re talking about. Sam and Marcia work with their attorney to establish their will and other testimony documents. They think there will still be a million dollars or so in their IRA at their death, and they designate a donor-advised account at DonorsTrust as the IRA beneficiary. They name their son the adviser on that donor-advised bequest account, which wouldn’t be funded until after their death. They leave guidance with DonorsTrust to make their charitable intent clear.
At their death, the IRA account balance goes to DonorsTrust – a charity – and generates a charitable deduction for estate tax purposes, reducing any estate tax that might otherwise be payable. If, in their lifetime, they want to change their charitable guidance or name a different adviser, they can make those changes easily without having to involve an attorney – it just requires a simple communication to DonorsTrust. They’ve established a charitable legacy in a way that is simple, secure, and tax-advantaged.
As with all things tax related, we advise you to speak with your tax or estate attorney about what the right solutions are for you. The benefits that a donor-advised account can bring are certainly something to broach as you work through your current and posthumous charitable endeavors.
Continue reading part 3 of this series: The Benefits of DAFS: Privacy and being understood