Before the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), philanthropic taxpayers who donated to their favorite charities were generally able to write off their contributions. But with the TCJA’s doubled standard deduction, most taxpayers are no longer itemizing and as a result, they are unable to claim their charitable donations.
Of course, most people who contribute to charities are not exclusively doing so for the tax deduction, but it is something they have come to expect and its elimination is of some financial concern.
However, there is a way around the new regulations. For generous donors, a Donor-Advised Fund (DAF) allows you to continue making contributions to your favorite charities, and still be able to receive a charitable tax deduction.
How a Donor-Advised Fund Works
A donor-advised fund is like a personal charitable savings account. A DAF account is created and then it is funded with either cash, stocks, real estate, artwork, and even cryptocurrency.
A DAF account is typically managed by a non-profit—also called a sponsoring organization—that invests and manages the account’s assets. The sponsoring organization might be a community foundation or a non-profit division of a financial services firm.
Once your fund is established, you inform your fund’s manager about which charitable organizations you’d like to donate to from your account.
A Real World Example
Let’s assume that in previous tax years, you generously gave $10,000 per year to your favorite charities. And before the TCJA was enacted, you were able to write off those contributions on your taxes. However, because of the new higher standard deduction, it is no longer feasible for you to itemize your charitable contributions.
Let’s say that instead of giving your usual $10,000 per year for the next five years (which you would not be able to deduct), you decide to create a Donor-Advised Fund in 2019 and give $50,000 to the fund. When you file your 2019 taxes, you are able to itemize and deduct the entire $50,000.
Then, in the next four years, you don’t make any more contributions to your fund; you simply “advise” your fund’s manager about which charities are to receive your donations. And in those same four years, you would elect to take the standard deduction.
Other Attractive Benefits of a Donor-Advised Fund
In addition to the tax benefit that is claimed with the creation of a Donor-Advised Fund, there are other advantages as well. For example, it is widely known that some charities are prone to misbehavior. Should such a problem come to your attention, you have the power to instruct your DAF to stop granting money to that specific charity. In its place, you could choose another charity to benefit from your DAF instead. This kind of oversight promotes good fund stewardship on an annual basis.
Also, the assets donated to your DAF grow tax-free, until a charitable gift is made to a qualified non-profit organization. But you are under no obligation to make contributions on a restricted schedule. You determine the pace of giving you’re comfortable with, year after year.
Other attractive benefits of a DAF include the following:
- Setting up a DAF is easier and less expensive than establishing other charitable mechanisms, like a private foundation, for example. You don’t need a team of lawyers, accountants or private foundation staff. Plus, you can create a DAF with far less money than what a private foundation requires.
- Your DAF is administered by your sponsoring organization and your advisor will manage the investments on your behalf, potentially growing your account and increasing the impact of your giving.
- Some families establish a DAF as a way to accomplish shared charitable goals—without the same costs and complications of setting up a private family foundation.
- A DAF will not incur any capital gains taxes on gifts of appreciated assets—securities, real estate, or other illiquid assets—and it is not subject to any estate taxes. Plus, if you are affected by the Alternative Minimum Tax (AMT), a Donor-Advised Fund will reduce its impact.
Does a DAF Meet Your Needs?
A Donor-Advised Fund is a great way to maintain your philanthropic giving and to preserve a charitable tax deduction. However, because everyone’s personal goals and circumstances are unique, it would be prudent to consult with your financial advisor before deciding to initiate its creation.
Our team of experienced advisors at WealthBridge strive to construct a personal financial plan that meets all of your life’s goals and priorities, including your charitable aspirations. We will carefully evaluate your portfolio objectives to determine if a Donor-Advised Fund is in your best interest.