By Jeff Zysik Co-founder of Charitable Entity Administration, LLC (CEA)
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 that other giving vehicles either cannot offer or offer only with additional monetary costs and time commitments.
The Tax Reasons
From a tax perspective, DAFs 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 percent of your adjusted-gross-income (AGI) can be deducted in the year the cash is contributed to a DAF account. You can donate long-term capital gain property, such as publicly traded stock, avoid capital gains on the sale of the stock, and claim a deduction of up to 30 percent of your AGI in the year of the donation. This compares to a 30 percent AGI limitation on cash gifts and a 20 percent limitation on gifts of long-term gain publicly-traded security donations to a private charity or 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. Donors 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.
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.
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. With a donor-advised account, you deal with only one charity, and virtually all DAF sponsoring organizations accept property gifts.
Year-end Grants
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. To do this, simply request each charity be informed the DAF account grant was made at your request.
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.