For many people, charitable giving consists of writing checks and giving cash to their favorite charities throughout their lives. However, there may come a time when you want to develop a more comprehensive charitable plan based on your long-term charitable goals, your estate and tax planning objectives, and your legacy. For those individuals who want to benefit their heirs and charity at the same time or who haven’t decided to which charity they want to give, there are several good options:
1. Charitable remainder trusts, charitable lead trusts, and charitable gift annuities, each of which provide benefits to the charity and to the heirs or grantor.
2. Private foundations provide an immediate tax deduction, up to certain deduction limits, and flexibility in the timing and charitable entities to which the foundation gives.
3. Donor Advised Funds (DAFs) also provide an immediate tax deduction, up to certain deduction limits, and flexibility in the timing and charitable entities that you direct the Fund to give to.
DONOR ADVISED FUNDS
Let’s discuss the benefits of using Donor Advised Funds. These Funds are established through a public charity and are available through a variety of sources including major brokerages such as Charles Schwab and Vanguard. Among the important benefits of using a Donor Advised Fund are:
• Ease of setting-up and administration. The DAF handles all administrative and regulatory requirements.
• Account minimums are low. For example, you can start a DAF at Charles Schwab with as little as $5,000.
• You can contribute cash or appreciated securities (provided they have been held for more than one year) and receive an immediate tax deduction, up to certain tax deductible limits.
• Once funds are received in the account, you can invest the dollars and direct grants at a later date and to the various organizations of your choice. Though not always required, you may need to give a minimum percentage away each year as directed by the fund.
• DAFs allow you to build a charitable legacy and potentially support charitable organizations beyond your lifetime and to extend your charitable funds to another generation within your family.
One of the key benefits in contributing to a DAF is the opportunity to give during your high-income years, rather than in retirement, and to receive an immediate tax deduction. Though you can give cash to your favorite causes, you can also give appreciated securities (stock and mutual funds) that are held over one year. This type of giving can provide you a deduction at the security’s fair market value while avoiding the gain on the stock. This is a great way to rebalance your portfolio and/or reset your basis on highly appreciated securities.
As with most tax deductions, there are limitations to your charitable contributions and you should always consult with an advisor prior to contributing substantial amounts to any charity.
DAFs are also an effective tool for legacy and estate planning. Money contributed to a DAF at or prior to death, reduces your estate and avoids federal or state estate taxes, if applicable. Depending upon the size of your contribution or account, your heirs may be able to continue the management of the assets and your charitable legacy through their future giving.
Charitable planning can include various strategies and Donor Advised Funds are one of the many effective ways to meet your charitable goals. At Soundmark, we are here to help you develop a plan and implement the strategies that are best suited to you and your family’s goals.
Todd Flynn, CPA, CFP ® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.