By Mindy Hirt
Over the past few years, donor-advised funds (DAF) have grown in popularity and for good reason. They are an excellent way for benevolent individuals and families to make a long-term charitable impact and receive a tax benefit in the process. Good candidates for DAFs include:
Individuals with low basis assets
Donors with a large tax liability that would like to maximize deductions in the current year
Anyone charitable that likes to take advantage of tax-free growth
Families who would like to start a legacy giving plan
MORE THAN JUST TAX-EFFICIENT
For individuals with appreciated assets, DAFs are not only tax-efficient, but they also help simplify giving. Instead of donating 100 shares of a stock to 10 different charities, you can simply donate 1,000 shares to one place – your DAF – and get one tax letter to provide your CPA. The best assets to gift into a DAF are those that have been held for at least one year. Otherwise, the deduction may be limited to the original purchase price of the asset instead of the current market value.
SAVE ON CAPITAL GAIN AND INCOME TAXES
Selling the asset inside a DAF can eliminate capital gain taxes. In addition, you get an income tax deduction for your donation. Currently the IRS allows a deduction up to 30% of adjusted gross income (AGI) for donations of appreciate assets. If your AGI is $100,000 and you donate $50,000 in stock to a DAF, you will only be able to deduct $30,000 for that taxable year. But don’t let that stop you from donating the full $50,000. You can carryover the remaining $20,000 and use it over the next five years.
DEDUCT NOW, GROW TAX-FREE AND GIVE LATER
To further explain the benefits, let’s look at John and Jane’s situation. They give about $25,000 per year to various charities, frequently by just writing checks. Jane will receive a large bonus at year end that will throw them into a higher bracket. They also have $100,000 in highly appreciated stock that they would like to sell but do not want to incur additional tax liability this year. They already did most of their annual giving but would like to increase their deductions to offset the additional income. Funding a DAF this year with the $100,000 in stock would allow them to offset income and sell the stock without incurring the capital gains tax. Since their total adjusted gross income (AGI) is $350,000, they will be under the 30% AGI limit and be able to fully deduct the charitable gift this year. By frontloading multiple years’ worth of donations, they will have time to benefit from tax-free growth within the fund.
ORGANIZE, STRATEGIZE AND CREATE A LEGACY
This gift will essentially allow John and Jane to make grant recommendations on their timeline. They can establish patterns of giving within their DAF and provide the next generation a roadmap to their charitable giving. Since DAFs can be set up to last more than one generation, they are a great way to engage the next generation and continue a family’s philanthropic mission.
Please contact your professional advisors or a member of Federation’s PAC to discuss if a DAF is right for you.
Mindy Hirt is Senior Vice President and Wealth Advisor at Argent Trust. She serves high net worth families with trust, investment, foundation, estate and family office services. She enjoys helping her clients find holistic solutions to their financial planning needs. She is a member of the Jewish Federation Professional Advisory Council (PAC). For more information about the PAC or upcoming seminars, please contact Shannon Small, Assistant FRD Director and Foundation Director at firstname.lastname@example.org.