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Donor-Advised Funds for the Season of Giving

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Donor-Advised Funds for the Season of Giving

As the holiday season approaches, many families assess their finances in anticipation of year-end charitable giving. I have a good idea for those fortunate enough to make charitable donations. Consider using a donor-advised fund (commonly referred to as a DAF). You will find this a simple, cost-effective way to make more of your gifts.

When you contribute to a donor-advised fund, you build an account intended to grow and simplify future donations to qualifying, tax-exempt nonprofits (or in IRS lingo, “501(c)(3) Organizations”). Common contributions to a DAF include cash and appreciated investments. Schwab and Fidelity require a minimum of only $5,000 to open an account and charge nominal fees based on account balance.

While the assets are no longer yours, you have control over the allocation and selection of fund options as well as the timing and amount of distributions. Once contributions leave your pocket, they qualify as a tax deduction for the current year, and the DAF could be your only charitable-giving recipient for IRS purposes. No more collecting receipts!

DAFs also work to the advantage of your favorite charities. Donation checks can be cut ad hoc or according to an automatic distribution schedule. It’s difficult to come up with an easier way to make ‘set-and-forget’ contributions. More importantly, the nonprofit receives something it can handle: cash! DAFs alleviate any investing and liquidating issues that might arise when gifting appreciated investments directly.

Take for example a stock you bought for $5,000 that is now worth $12,000. You could sell then donate, but this would cost you $1,400 in taxes at the 20% capital gains rate. On the other hand, imagine you contribute this stock to a DAF. You get the full $12,000 tax deduction and save $1,400 of income tax while the charity gets a $12,000 check.

Bunching deductions in conjunction with a DAF is another way to further the tax benefits of your generosity. Consider the following: Every year the Smith family donates $15,000 by tithing $1,250 a month to their church. As a couple filing jointly they elect the $24,000 standard deduction. Realistically their cash flow could support donating $30,000 every other year instead. But how does this help?

If the Smiths were to “bunch” two years’ donations and contribute $30,000 in 2018, they could itemize on their tax return and take advantage of that $30,000 deduction. Then in 2019 when they contribute $0, they could revert to the $24,000 standard deduction. Using a DAF, the Smiths could alternate contributing years for the tax advantage, while still distributing payments to the nonprofit on a desired schedule. In other words, their church could continue receiving $1,250 per month, and the Smiths could deduct $6,000 more every other year. What a win! As an added bonus, DAF contributions will be invested longer with more time to grow.

If you are serious about making charitable contributions, consider using a DAF to make donating simpler and more cost effective.  Everyone wins when you get more for your giving.

This article was featured in the November 4, 2018, print edition of the Knoxville News Sentinel and online at KnoxNews.com. Tom Coulter, President of Meridian Trust, can be reached at tcoulter@trustmeridian.com.