Preserve Tax Deductions by Using Donor-Advised Funds Strategically

With the new tax rules, fewer people will be able to claim itemized deductions in 2018. Is there a way to keep charitable contributions deductible?

With a donor-advised fund, it may be possible, but it takes planning.

A donor-advised fund is like a charitable savings account. Donors can contribute to the fund whenever, and then recommend grants to various charities.

Donor-advised funds are the perfect way to manage charitable giving under the new tax rules. Many taxpayers will get more bang for their charitable buck by lumping donations into one calendar year rather than giving them evenly each year.

Here’s an example: Suppose you’re a married couple with $20,000 worth of deductions, including $3,000 you plan to give to charity in 2018, the new $24,000 standard deduction means you’ll no longer benefit from itemizing deductions. However, if you give $9,000 this year to a donor-advised fund, you’ll exceed the $24,000 threshold and will, therefore, benefit from deducting your charitable contributions. In 2019 and 2020, you can choose to give the fund nothing and thus stick to your $3,000 yearly budget averaged over three years.

If this is an especially high-income year, gifts can be timed to make the most of a potential tax deduction, even if the charity has not yet been decided. A large enough contribution might even keep an individual from climbing into a higher tax bracket.

Giving appreciated securities is one of the most tax-efficient ways of donating, in order to avoid capital gains taxes and pass more value to the charity.

However, it may not be practical if the amount given to a particular charity is small or if the charity does not accept asset donations. Instead, donate appreciated securities to the donor-advised fund, then relay to the fund the amount given to each charity.

Between the time of contribution to the fund and disbursement of the gift to a charity, the invested assets grow tax-free.

While donors can make grant recommendations to the fund's sponsor, technically they are not binding, though they’ll normally be followed. Gifts to a donor-advised fund are irrevocable.

Flexibility and Estate Planning

Donor-advised funds are flexible. Some require a relatively small donation to establish an account. Grants may be directed to any bona fide charity at any time. The minimum grant size is usually low, in the range of $50.

Funds can be used in combination with other charitable giving strategies, for example, you can make the fund a beneficiary of your IRA. You’d name a family member or another trusted person in charge of choosing the charities to receive distributions after your death.

IRA distributions to your heirs are subject to income tax if a tax deduction for a contribution was received, but the portion given to charity is not taxed.

This technique can allow for the incorporation of charitable intentions into an estate plan while preserving greater flexibility than naming a charitable beneficiary outright. It can also involve children or heirs in philanthropic work.

Donor-advised funds, though often advantageous, are not right for everyone. For instance, if you plan to make a large one-time gift, giving directly to the charity may be simpler and more cost-effective since you’ll also avoid the fees the fund charges.

Benjamin Sullivan, Certified Financial Planner (CFP®), IRS Enrolled Agent (EA), is a client service and portfolio manager with Palisades Hudson Financial Group’s Austin, Texas, office.Palisades Hudson is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at www.palisadeshudson.com.