By: Investor Solutions
There are a number of reasons to give money away. I’m sure you’ve thought about them all, but have you thought about all the different ways to do it? Many of those ways are more advantageous than simply giving cash or a check directly to a charity or even creating a private foundation. One such valuable tool in the realm of charitable giving is the Donor Advised Fund. A Donor Advised Fund is a vehicle administered by a qualified public charity and created to manage charitable donations on behalf of organizations, families, or individuals.
How a Donor Advised Fund works:
In exchange for the maximum deduction being received by the donor at the time of the gift, the third party administering the funds gains full legal right to the contributions, but grants the donor advisory status. This means that even after the gift has been made the donor has the authority to instruct the fund as to which charities should receive the donations and how much they should get. Since only your desired amount is paid out each year, it is possible to set recurring donations that last long after your life expectancy. Donor Advised Funds can be named as beneficiaries of charitable bequests, charitable remainder trusts, charitable lead trusts, and qualified retirement plans. You also have the ability to select successors who gain full responsibility for decisions relating to the account and can recommend grants beyond your lifetime. For these reasons and by involving family members, a Donor Advised Fund is an excellent way to establish a legacy.
Tax and Administrative Advantages:
A Donor Advised Fund offers a flexible, easy, low-cost way to make donations. Donors do not have the burden of bearing the cost of establishing or administering a private foundation, which may include staffing and legal fees. The time spent, limited paperwork and ease of contribution make Donor Advised Funds a popular option. You will receive consolidated statements, record keeping and IRS ready tax information. The administrator of the fund will perform due-diligence and verify the grantee’s qualified status for you. Private foundations in the United States are heavily regulated by the IRS (oversight and minimum annual payouts). Donor Advised Funds are not subject to the same restrictions.
- This allows you to increase the value of your contribution through the compounding of investment returns.
If you are an individual who makes cash contributions to a charity, let’s say a church, and you take your deduction up to 50% of your AGI, you could instead gift appreciated stock to a Donor Advised Fund. This will allow you to avoid the capital gains tax you would have had to pay upon selling the securities either for your own use or using the cash from the sale for the charitable contribution. Once you’ve donated the stock and avoided the capital gains tax, you can take the cash you would have normally contributed to your charity and buy back the stock. This allows you to retain your allocation but at a higher cost basis.
There are a few things to look out for when using this strategy. As mentioned before, the allowable deduction in a year from gifting appreciated stock is up to 30% of your adjusted gross income (AGI), whereas if gifting cash, you are allowed up to 50% of your AGI. This is something to keep an eye out for; however, the saving grace is that you are allowed to carry over the excess and deduct it in any of the 5 additional years beyond the year you made the charitable gift. Also, don’t give away depreciated assets, there is no tax savings in that and be aware that you aren’t giving away appreciated securities that you have held for less than one year. Any securities with short-term gains will be taxed at your regular rate.
Establishing a Donor Advised Fund:
If you are interested in establishing a Donor Advised Fund, call Investor Solutions, Inc. at 1-800-508-8500. We can help you name, fund, and open your Donor Advised Fund. We work with the leading providers.