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« Black Swans | Main | Tax Diversification »
Friday
Nov142014

Do Well While Doing Good: Donor Advised Funds

The charitably minded well-to-do have long enjoyed the tax benefits of charitable trusts and foundations.  If properly designed, they allow them to support their favorite charitable causes while enjoying generous tax benefits.  Typically these types of arrangements are expensive to set up and require oversight to ensure that they stay in compliance with tax laws.  Thus, they are usually not cost-effective for middle income givers.  That changed with the advent of “donor advised funds (DAFs),” and we peons can now reap the same tax benefits as the rich.  Here is how they work.

A number of mutual fund companies (Fidelity offers a good one) now offer DAFs for their clients.  Once you fill out the appropriate paper work, the fund company will gladly accept custody of your donated money, invest it as you advise them to do, and put it in a great big pot of money with other like-minded donors.  When the fund company receives your money, it has been donated.  The fund is a tax qualified 501(c)(3) charity, and you can take the charitable deduction on the entire amount of money donated in that year.  You then advise the fund company to whom you want the money given at some future time, and they will send your money to those charities, as long as they meet IRS requirements.  You may parcel the donated money out to various charities over a number of years if you like.  Almost all of the well-known charities qualify, and most, if not all, churches meet those requirements.  Many families are now making their church contributions via automatic, recurring, DAF disbursements.

DAFs allow givers a number of tax planning tactics. They can pre-fund several years’ charitable contributions in one year to maximize tax benefits in a particular year, and that can really make sense when the funding uses appreciated assets from a taxable account.  For instance, if you are holding shares of a mutual fund with a large capital gain, you can transfer those shares to your DAF and take a deduction for the entire amount.  Were you to first sell those shares in order to  make the contribution, you would be left with less to give as you would first have to pay the capital gains tax on the sale.

They can also prove useful by offsetting the income one realizes when converting a traditional IRA to a ROTH IRA.  If someone were to convert $10,000 of traditional IRA funds to a ROTH, federal tax would be required on that amount.  However, if they were to donate $10,000 to their DAF from a taxable account in the same year, they could offset the tax requirement of the ROTH conversion, and ROTH conversions can often prove beneficial.

DAFs can also help you surpass the standard deduction threshold when you file your tax return.  Consider a retired couple, both 65.  Their standard deduction for 2014 will be $14,800.  Unless they can surpass that threshold with itemized deductions, they will not realize any tax benefit from their giving.  However, if they were to choose to prefund their DAF for a number of years, it might put them over the threshold.  If they were to also to pay two years of real estate taxes in that same year, they might very well surpass the standard deduction threshold and realize some significant tax savings.

DAFs have thus far remained off the radar for most in spite of the fact that they can be such an effective way to give.  If you are going to give the money anyway, you might as well give it in a way that is most advantageous to you.  DAFs can offer that advantageous way.  You might as well do well while you do good!  Feel free to contact me with any questions, and remember, though far from the most important thing, still, money matters.

Fly/Drive Safely

13 November 2014

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References (2)

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    Retirementflightplans - Journal - Do Well While Doing Good: Donor Advised Funds
  • Response
    Response: Vince Malfitano
    Retirementflightplans - Journal - Do Well While Doing Good: Donor Advised Funds

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