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Posted on April 3, 2018

Charitable Planning with a Donor-Advised Fund

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Published by Scott Danek

Like many Americans, most of our clients are charitably inclined, having grown up with a tradition of some level of family philanthropy. Whether it’s giving back to their church, being involved in their community or sponsoring their favorite charity, Americans share in a charity’s focus of improving quality of life.

According to the Giving USA 2016 Annual Report, Americans contributed $373.25 billion to U.S. charities[1]. When adjusted for inflation, this figure represents an 83% increase over the past two decades. By donating money and time, not only can we can benefit those immediately impacted by our gifts, but we can also improve our own emotional and financial wellbeing.

Strategic Tax Planning

The federal government recognizes the importance of philanthropy and the impact and it can have on those who need help. Accordingly, there are a variety of income and estate tax incentives to encourage charitable giving. As a general rule, charitable donations made to a qualified charity are tax deductible and may reduce the amount of income tax you pay during tax season. For those looking to incorporate charitable giving into their financial plan during their lifetime, depending on the gifting vehicle (i.e., direct gift, charitable trust, etc.), the deduction against Adjusted Gross Income (AGI) can be as high as 60% of AGI. For those who may be impacted by estate taxes, it may be a useful tax planning strategy to include charitable giving at death to reduce the net value of your estate as there are no limitations on how much can be deducted from estate taxes.

Donor-Advised Funds

For individuals who want a turnkey giving solution with low costs and the potential to watch the amount of their charitable gifts grow over a time, a Donor-Advised Fund may be a good solution. A Donor-Advised Fund is a charitable giving vehicle sponsored by a public charity that allows you to make an irrevocable (binding) contribution to that charity and be eligible for an immediate tax deduction.[2] After you make the initial grant, you will then recommend grants to any qualified public charity. When compared to a private foundation or charitable trust, the amount of the initial contribution to a Donor-Advised can be minimal and could be as low as a few thousand dollars.

A Donor-Advised Fund can be a useful planning strategy during years with unexpectedly high earnings by allowing you to take an immediate tax deduction of 50% of AGI for cash gifts and 30% of AGI for appreciated assets. The amount of the contribution does not have to be gifted from the Donor-Advised Fund to a qualified charity in the year of the gift. Instead, you are allowed the flexibility to support the charities you care about immediately or over time. If you receive several requests on an annual basis to contribute to charities, a Donor-Advised Fund could help you simplify your charitable giving. For those looking to instill philanthropy in younger family members, a Donor-Advised Fund can also help build a charitable legacy while at the same time the funds are given the opportunity to grow allowing more money to be donated to charities whose mission is important to the donor.

When contemplating the implementation of a Donor-Advised Fund as part of your charitable giving, it’s important to consider that although you choose where to make grant recommendations, the charity sponsoring the Donor-Advised Fund has the ultimate control over where those grants will go. However, most Donor-Advised Funds will give deference to the donor’s recommendations. Additionally, grants can only be made to qualified charities, must be used for charitable purposes and cannot be used to satisfy binding pledges.

Because the rules can vary depending on the type of asset you plan to gift and the vehicle by which you give, it’s important to discuss your specific situation with your Advisor before implementing your specific charitable giving strategy to ensure your goals and intended legacy are thoroughly contemplated. Investment advisory services offered through CWM, LLC, a registered investment advisor. This information is not intended to be a substitute for specific individualized legal or tax advice nor is an endorsement for a particular candidate or political party. We suggest you discuss your specific legal or tax issues with a qualified advisor.

[1] Giving USA 2016: The Annual Report on Philanthropy for the Year 2015.

[2] https://www.fidelitycharitable.org/docs/charitable-planning-guide.pdf

 

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