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Donor-advised funds popular with tax reform

| Feb 14, 2019 | Charitable Donations, Tax Planning

The donor-advised fund is becoming a more popular vehicle for charitable giving under the recent tax law reforms.

Among many changes, the new tax laws increase the standard deduction for both individuals and married couples, making it more beneficial for many taxpayers to simply take the standard deduction instead of itemizing and capitalizing on things like state and local taxes, student loan interest and mortgage interest.

Since many taxpayers will no longer benefit from itemizing deductions, this has become a way to retain the benefit of charitable donations that previously would have been itemized. This vehicle may also be a beneficial planning tool for donors who have experienced a particularly high income year.

With an initial contribution of at least $5,000, anyone can open up a fund that can then be professionally managed and invested. Once created, the donor can use the fund’s assets to contribute to his or her favorite charity, at any time.

Using this vehicle, a taxpayer could potentially fund a few years’ worth of giving in one tax year. The idea is, then, to contribute enough to make itemization more beneficial in the contribution year, even if the standard deduction is more beneficial in other years. Then, rather than giving the entire contribution amount to the charity in the contribution year, the donor can opt to spread the contribution out over several years, allowing the remaining balance to grow between donations.

As a simple example, say an individual typically donates $4,000 annually to charitable causes. This donor could pre-fund five years of giving, or $20,000, into a donor-advised fund. He or she can then direct annual contributions at the same level, while contributing enough in a single tax year to make itemization worthwhile, thus deriving a greater tax benefit than the standard deduction every fifth year.

In addition, appreciated non-liquid assets, such as securities, can be contributed. As such, many opt to use a donor-advised fund as a mechanism to reduce or eliminate capital gains tax, lower total income tax liability, and, ultimately, to provide a larger donation to the cause of choice.

Donor-advised funds may also be used as part of an overall estate plan.

Of course, the desirability of this type of fund will depend on several factors. A donor-advised fund may have significantly lower overhead than, say, a private foundation. However, a foundation or dedicated non-profit organization may have greater longevity. While a foundation or organization could last for generations, some organizations that sponsor donor advised funds may have limits as to how long that donor-advised fund can exist. And, while other giving mechanisms may afford greater control over the use of funds, a donor-advised fund theoretically only takes advice from the donor about the use of the monies, rather than being mandated to use those funds in a particular way (although it would be unusual for a sponsoring organization to use the funds against the donor’s direction.)

Ultimately, if you think that this type of vehicle may be right for you, you will want to speak with a financial professional to determine what is best for your situation.

This article originally appeared as a column for the Cleveland Jewish News.