Donor Advised Fund
The picture above is of Feast World Kitchen, a 501(c)(3) non-profit located in Spokane, WA. Feast features a rotating group of chef-entrepreneurs who share flavor and culture from around the world. As a non-profit Feast is an example of an organization that you can make charitable gifts to and receive a tax deduction.
For six and half years I worked as a Pastor in Silicon Valley. Silicon Valley is a pretty incredible place. The weather is amazing. It is almost always 70 degrees outside and sunny. The terrain is beautiful. You can hike in the redwoods and swim in the Pacific Ocean on the same day. Interesting people from all over the world migrate to Silicon Valley to work at big tech companies. As you can imagine, the wealth generated by those companies permeates throughout that land.
One day when I was working at the church, we received a check that was made out to the church for a very sizable donation. This check came from a Donor Advised Fund. This piqued my interest because I was used to people writing personal checks for their charitable giving.
As I learned then, and even more so now as a financial planner, the Donor Advised Fund is a great tool to make tax-optimized charitable gifts.
What is the Donor Advised Fund?
At a very simple level, people are able to open a variety of different kinds of accounts at custodians. As an example, if you were to go to Vanguard’s website, you can open a Roth IRA, an IRA, a Brokerage Account, a Donor Advised Fund, etc. Each of these accounts have different tax implications for the assets they hold. The Donor Advised Fund is a special account that you can open that has particular characteristics that can help you optimize your charitable giving.
How it works:
Create a Donor Advised Fund giving account
Fund the account with cash, stocks, and/or non-publicly traded assets
Once funded, this is an irrevocable gift to a future charity (the funds cannot be returned to you or another individual other than for charitable purposes)
In return for the gift, you receive an immediate tax deduction
While the gift is in the account, you can select a variety of different assets that grow tax-free
You can choose to make gifts from the Donor Advised Fund to any IRS-qualified public charity with grant recommendations from the account
Choose a beneficiary of the account that would receive the remainder of the fund in the event of your death
How is the Donor Advised Fund a powerful tool for charitable giving?
Every year when you file your taxes, you have the option of taking the standard deduction ($25,900 for married filing jointly or $12,950 for single filers) or itemizing your deductions. Taxable income is your Adjusted Gross Income (AGI) minus either the standard deduction or your itemized deductions. Taxable income is then multiplied by your tax bracket to arrive at taxes due on your federal tax return. Deductions are a helpful way to reduce your taxes. Charitable giving falls under the category of an itemized deduction. The more charitable gifts you make, the more deductions you receive as long as you itemize.
The Donor Advised Fund is great because you can stack your charitable gifts in one year and take an immediate tax deduction. You can also receive extra tax benefits if you transfer long term held assets into the Donor Advised Fund instead of cash. Once the money is in the fund you can choose to make “grants” to the charity of your choosing.
Here’s an example of how the Donor Advised Fund can help minimize taxes and optimize charitable giving:
Say you are a married couple and every year you have about $20,000 in deductions that could be itemized including your annual charitable gift to your church of $10,000 a year. Let’s also say that you purchased stock in a company 20 years ago for $10,000 and the current fair market value of the stock is $100,000 and the stock is being held in a taxable brokerage account. Normally if you sell that stock, it creates a taxable event and you’ll have to pay long term capital gains rates. If you are charitably inclined and you know that you’d like to gift $100,000 in the future in $10,000 increments over the next 10 years, instead of making cash gifts on an annual basis, you can transfer the stock to a Donor Advised Fund. When you make this transfer you get to take a charitable deduction of $100,000 up to 30% of your AGI and you don’t have to pay capital gains tax on the stock. If the $100,000 exceeds 30% of your AGI, you can carry it over for the next five years as a future deduction. Once the stock is in the Donor Advised Fund, you can sell or exchange the stock for other financial tools that grow tax free. When you are ready to make a gift to the charity of your choosing, you simply sell a portion of those tools into cash and make a grant.
Effectively, you can bundle your charitable gifts in one year, rather than spreading it out for the next ten years and take a large tax deduction.
Gifting to a Donor Advised Fund can also be a wise decision if you happen to have a large Roth conversion. If you have a Roth conversion of $200,000 in one year, and you know you’ll want to make charitable gifts of $200,000 in your lifetime, you may want to make a gift to a Donor Advised Fund in the year of the Roth conversion to offset some of the taxes associated with the conversion.
In the end, the Donor Advised Fund can be a fantastic way to make tax efficient charitable gifts. Many of the major custodians like Vanguard and Fidelity have Donor Advised Funds. I specialize in helping generous people who seek tax efficiency with their current charitable endeavors and with their estate plans. If you are interested to see how this may work well for your financial plan, please click here to set up a meeting with me or give me a call and I’d be happy to talk to you.
