A donor advised fund (DAF) is a charitable savings account, a type of charitable vehicle opened with a public charity, often a community foundation or an arm of a large brokerage firm. Contributions to a DAF receive a tax deduction at the time of funding, while gifts to your favorite charities from the DAF can be made at a later time.
2018 may be a good year to consider opening a donor advised fund. Until the Tax Cuts and Jobs Act was passed at the end of 2017, to the extent Schedule A deductions were greater than $12,700*, charitable contributions were itemized and collectively along with other itemized deductions worked to reduce a taxpayers taxable income. The TCJA however made significant changes to Schedule A. A number of itemized deductions have been eliminated while others are now limited. The new standard deduction for a couple is $24,000 or $26,600 if over age 65. Thus, if your total allowable itemized deductions are below the new higher standard deduction, you may not receive favorable tax treatment for your charitable gifts.
“Front-loading” charitable giving through a donor advised fund is one possible solution to preserving the tax benefit of your charitable donations. The concept is straightforward – lump multiple years of charitable donations into a DAF in year one. Aggregating several years of gifts into one year will push the total deductions over the higher standard and allow you to itemize and deduct the full value of the gifts on the front-end, in year one. In subsequent years, giving can be made directly from the DAF. In these years, the taxpayer would use the standard deduction. Alternating itemizing vs. taking the standard deduction will capture the maximum tax benefit in year one while not disrupting the taxpayer’s annual charitable giving plan.
Opening a donor advised fund is an easy process. DAFs can be opened with a local community foundation or through an arm of a brokerage firm offering a national program. Both Charles Schwab and Fidelity Investments offer donor advised funds. Opening minimums depend on the sponsor and usually start with a minimum contribution of $5,000. Low cost- basis (or highly appreciated) securities are perfect charitable giving candidates. The security is transferred to the DAF avoiding capital gains altogether because the DAF is a not-for-profit and therefore doesn’t pay income tax.
A family giving legacy can be established through a donor advised fund. The community foundation endowed model, given its long term approach, unites family members of multiple generations. Community foundations offer assistance in creating a family’s charitable mission statement as well as resources to support a family’s non-profit research. Valuable financial stewardship principals can be learned as younger family members work with parents and grandparents on a common philanthropic purpose. Members of the younger generation can also be named as successor owners of the fund.
Lastly, administration (i.e. paperwork) is consolidated and reduced through a donor advised fund. A tax receipt is generated on the front-end for the gift made to the donor advised fund. From this initial gift, many smaller gifts can be made from the fund, eliminating a slew of tax receipts for the smaller gifts.
Please reach out to your advisor with any questions.
*2017 standard deduction for MFJ (married filing jointly)
Betsy Cunagin, CFP®
Senior Financial Advisor