December 27, 2018 in Articles & Newsletters | by Scott Wood

Donor Advised Funds: A Solution to Gifting with Tax Benefits

During a season of giving, it is evident that the framework for donating funds to charities or organizations has changed. Our clients have organizations that they are passionate about, and plan to make yearly gifts to them. The tax deduction they received in the past was a bonus. Many charities felt the tax-deduction to the individuals gifting helped increase donations. However, the tax-benefit of gifting has changed since The Tax Cuts and Jobs Act (TCJA) came in effect this year.

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Our clients that gifted regularly used itemized deductions for their charitable giving when filing their taxes. The TCJA change has charities anticipating that donations may be down since the new act is likely to discourage charitable giving.  TCJA also caps state and local tax (SALT) deductions, making the upcoming tax season one that will financially impact many of our clients.

However, there is a solution to the tax benefits of giving through Donor-Advised Funds (DAF).  Donor-Advised Funds allow individuals that are gifting to “bunch” more substantial contributions together instead of making yearly contributions, helping to push their itemized deductions above the standard deduction level. This strategy can also be used outside a DAF as a tax-savings strategy. Some additional features of DAFs:

  • All of the DAF contribution is tax-deductible when moving money into it at the time its set up.

  • If you gift highly appreciated securities to your DAF, you benefit tax-wise on 2 levels…you skip paying capital gains tax on the securities transferred and you receive the itemized tax deduction.

  • You do not “own” the securities any longer, but you maintain “control” of the funds.  You or someone in your family determine which charities the future gifts go to.

  • There are multiple custodians that will establish a Donor Advised Fund for you.

  • The DAF allows for multiple charities to benefit. Foundations can benefit multiple charities as well.

  • If invested effectively, the funds can grow tax-free, resulting in considerable donations later.

  • Donations from the fund issue as ‘gifts’ to a charity, or multiple charities.

  • To use the contribution as a deduction for your 2018 tax-filing, the DAF must be set up and funded by 12/31/2018

If you have questions on DAFs and how they may fit into your wealth management and charitable giving plan we are a source of information for you. Now is the time to consider a DAF, especially if you plan to use your DAF contribution as a tax-deduction for 2018. The deadline for setting up the DAF through a custodian and funding it for 2018 is December 31, 2018.

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