Most of our clients have a keen interest in charitable giving. With a donor-advised fund, you may be able to align your charitable giving goals and your tax needs.
A donor-advised fund is a vehicle by which you are able to deposit charitable donations throughout the year and get a tax deduction in the year of each deposit. Your deposits can meanwhile grow in the fund until you are ready to make a contribution to the charities of your choice. You can also donate stocks from your standard portfolio to the fund without having to realize capital gains, while getting the full benefit of the donation at market value. You may choose to remain anonymous or use a name of your choice (ie. The Ahmed Family Charitable Fund).
Making charitable contributions through a donor-advised fund may allow you to:
- Claim an immediate tax deduction
- Avoid capital gains
- Invest in the most flexible investment options
- Recommend an investment advisor to manage the assets in the fund
- Involve children and other heirs in charitable giving
- Build an endowment
- Recommend grants to qualified charities
Here are three examples provided by the Renaissance Charitable Foundation for donor-advised fund strategies. Keep in mind that these examples are hypothetical and for educational use only:
- A married couple with an adjusted gross income of $200,000 and a total net worth near $2 million wish to lower their tax burden while benefiting their favorite charities. Establishing a donor-advised fund (DAF) with $50,000 of appreciated securities allows them to take a $50,000 income tax deduction and avoid state and federal capital gain taxes when the DAF sells the securities. They are now able to recommend grants to charities from the newly-formed DAF while benefiting from a tax savings of over $20,000.
- A retired teacher wishes to create and fund a college scholarship program to assist students at the high school where she taught. After consulting with the school, she creates a scholarship fund with a DAF by contributing the first of a series of $10,000 annual gifts to the fund. Each following year, after selecting the scholarship recipient(s), she recommends that the foundation make a grant from the scholarship fund. She now receives an income tax deduction for each gift to the fund and, because the scholarship fund carries her name, ensures her legacy as an educator.
- A married couple with an adjusted gross income of $85,000 and a net worth of $1 million, including a highly-appreciated $150,000 rental home, wish to sell the rental home and benefit local children’s museum. By transferring the real estate, along with a $10,000 mutual fund to cover anticipated holding costs and expenses, to a DAF and allowing it to sell the property tax-free, the net sale proceeds can be used to create a $150,000 donor-advised fund from which they can now make quarterly grant recommendations to the children’s museum. The couple thereby completely avoids capital gains taxes, receives an income tax deduction for transferring the property to the DAF, and will able to benefit the children’s museum in perpetuity.