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If you are looking to make a positive impact on the world, while also reducing your tax liability, we encourage you to consider establishing a donor-advised fund. A donor-advised fund (DAF) serves as a vehicle to donate assets directly to a charity typically of your choosing. However, the sponsoring organization maintains ownership of the fund and holds legal control of all donated assets. In exchange, donors are granted an advisory role within the charity to recommend the spending and investment of their donations.
For individual donors, this fund also provides several attractive tax incentives. Here are just a few reasons to consider placing some of your assets in a donor-advised fund.
1. Tax Deductions
As with other modes of charitable giving, individual donors can expect deductions from their yearly income tax. Donor-advised funds are also generally not subject to estate taxes, and the donated assets can avoid capital gains taxes.
That said, DAFs are subject to a couple of limitations:
- Cash donations must not exceed 60% of your adjusted gross income for the year.
- Donations for other appreciated assets and securities must not exceed over 30% of your annual AGI.
If a donor chooses to donate real estate holdings or closely held stock through their fund, they typically can deduct the full value of those assets on their yearly tax return.
Because the tax deductions of a donor-advised fund occur immediately, this charitable strategy offers a level of flexibility for individual donors and their families. For example, if a donor experiences an unexpected windfall one year, transferring their assets into a DAF can help them avoid a higher-than-average tax bill. Donors who come into possession of high-value assets and are concerned about the associated capital gains tax may also want to consider setting up a DAF.
While DAFs do provide donors with less personal control and autonomy than a private foundation, DAFs are typically much less expensive to establish and maintain. There is also substantially less risk of running afoul of tax laws and regulations. The minimum initial donation into a DAF typically ranges from $5,000 to $25,000.
3. Investment Opportunities
Aside from immediate tax benefits, donors can diversify their charitable investments through a DAF. For donors who want to leave a lasting impact on their community, a DAF can typically make donations to any public 501(c)(3) organization. Some examples of these organizations include:
- Service-oriented nonprofits (such as homeless shelters, food banks, and animal rescues)
- Places of worship
- Colleges and universities
Many of these organizations depend on donations to remain operational year after year. After you set up your donor-advised fund, investment options will open for your donated assets. With the right investments, your assets may be able to grow tax-free, and you will be able to maximize your donation years down the line.
Many public organizations do require annual minimum donations from donor-advised funds. Though, these donations can be as low as $50 a year. It is also important to make certain whether the DAF itself limits the scope of possible charitable beneficiaries.
A Few Things to Keep in Mind
The Internal Revenue Service has scrutinized “a number of organizations that appeared to have abused the basic concepts underlying donor-advised funds.”
We cannot advise on the level of scrutiny the IRS conducts when seeking out such organizations. However, we recommend only establishing your donor-advised fund through trusted financial institutions and brokerage firms, or larger charitable organizations that offer them. If you are unsure of where to start, we suggest speaking with an estate planning attorney or financial advisor who can help point you in the right direction.
Following the Tax Cuts and Jobs Act of 2017, the use of donor-advised funds as a tax benefit increased nationwide. In short, this act—primarily focused on decreasing taxation for high-income earners—doubled the standard tax deduction for taxpayers. Considering the relatively recent adoption of this act, and the new administration in Washington, donors should be aware that new legislation tackling tax reform could be introduced at some point soon.
If you have questions about the best charitable strategies for your estate plan, please contact us at (443) 589-5600. At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best estate planning tools for their specific needs and desires.
Related blog posts:
Is a Qualified Personal Residence Trust (QPRT) Right for You?
When to Consider Using a Qualified Charitable Distribution (QCD) to Reduce Taxes
Estate Planning for Owning Real Estate in Multiple States
Understanding the Ins and Outs of Charitable Giving
The Top 5 Benefits of a Trust