Consider Tax Savings with a Donor-Advised Account

Consider Tax Savings with a Donor-Advised Account

If you haven’t finished (or even yet begun) this year’s charitable giving, consider establishing a donor-advised account to facilitate and simplify your year-end giving in a tax-friendly way.  Donor-advised fund accounts are easy to establish.  Once the account is opened, not only can it serve you well for your immediate needs, but it will be available in the future to serve as the hub for all your charitable gifts.

There are many methods and platforms for carrying-out your charitable giving.  In recent years, however, one charitable vehicle has zoomed to the fore-front of charitable planning – the donor-advised fund, or DAF.

Why?  Because in addition to offering the most attractive tax deduction rules, donor-advised accounts provide flexibility other giving vehicles either cannot offer or offer only with additional complexity, and, often times, additional monetary costs and time commitments.  Since you are planning year-end gifts in any event, why not choose now as the time to open a DAF account?

The Tax Reasons

From a tax perspective, DAFs are attractive charitable vehicles.  Donor-advised funds are programs of 501(c)(3) public charities.  Since DAF programs are sponsored by a public charity, donations credited to a DAF account receive the most favorable tax treatment.

Cash donations of up to 50% of your adjusted-gross-income (AGI) can be deducted in the year the cash is contributed to a DAF account; and you can donate long-term capital gain property, such as publicly traded stock, avoid capital gain on the sale of the stock, and claim a deduction of up to 30% of your AGI in the year of the donation.  This compares to a 30% AGI limitation on cash gifts and a 20% limitation on gifts of long-term gain publicly traded security donations to a private charity, such as a private foundation.

A tax deduction is available at the time assets are contributed to a DAF account.  That means that you can receive a current-year deduction for a gift made into your fund before December 31 even if you wait until the new year to recommend any grants to charities.

Donor-advised accounts offer this beneficial treatment because a donor gives up all ownership interests in the contributed assets.  The donor (and/or their appointees) merely receive the privilege of providing advice with respect to account assets.  Donor-advised account donors and advisers have no legally enforceable rights with respect to assets in a DAF account.

Many Benefits Beyond Taxes

However, the tax benefit is only one piece of a much larger puzzle.

Take, for example, the fact that you likely wish to make gifts to multiple operating charities at year-end.  If you want to support five charities, you need to write five separate checks.  You receive a tax deduction letter from five different organizations.  You need to separately track the donations.

If, on the other hand, you open a DAF account and contribute to the account today, for tax purposes your donation is to one charity.  You receive and must keep up with only one tax acknowledgement letter.  The DAF sponsoring organization will supply you with a statement you can use to track what organizations you have supported, and the amount of that support.

An even greater simplification exists for donations of marketable securities and other property.  Say there are five charities you wish to support at year-end, and you want to donate appreciated securities.  That would mean five different sets of instructions to your broker.  It also assumes all five charities are capable of handling property donations.  If, instead, you establish a donor-advised account, you need deal with only one charity when making the donation, and virtually all DAF sponsoring organizations accept property gifts.

Once the DAF account is funded, you can request year-end grants be made to the five charities you wish to support.  You need provide advice to only one organization, rather than writing and mailing five checks.  And you can continue to receive recognition from the five charities for your support.  To do this, simply request each charity be informed the DAF account grant was made at your request.

Finally, though they require a much greater discussion, other charitable platforms also function well with donor-advised funds.  Charitable lead trusts, charitable remainder trusts, simple bequests, and even foundations can all partner with a donor’s DAF in ways that offer great flexibility, simplicity, and tax savings.

All this means that, once established, your donor-advised fund is available for use as the core of your charitable planning.

Making A Donor-advised Account Work For You

Financial advisers and estate attorneys rightly point their clients toward donor-advised accounts as an effective charitable vehicle to incorporate in their planning.  They do this not only for income and estate tax planning purposes, but because of the flexibility DAF accounts provide to their clients’ overall philanthropic plan.

In fact, few, if any, taxpayers with financial savvy are primarily motivated to make charitable gifts because of the tax deduction.  And why would they be? The “savings” that come from charitable giving does not make giving tenable for people who wouldn’t also give for other reasons.

The mission-oriented nature of DonorsTrust offers an additional benefit.  Our focus on donor intent protection and the principles of liberty means our clients can rest assured that assets held in a DonorsTrust account will be used only to further their principles that support the good of society.

This combination of benefits makes a DonorsTrust donor-advised account such a powerful tool for managing charitable giving, both at the end of the year and over the long term.

This is the third installment in our Consider blog series. You can read about how to avoid the year-end giving rush in the previous post, Consider Simplified Year-End Giving. Our next post, Consider Legacy Security for Your Charitable Intent discusses how donors can approach preserving their intent when crafting their charitable legacy. You can also download the full Consider booklet here.

About the Author

Jeff Zysik Jeff Zysik
Jeff Zysik is COO and CFO at DonorsTrust. He is an attorney and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Before joining DonorsTrust, he was managing-director and co-founder of Charitable Entity Administration, LLC (CEA).

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