As year-end tax planning and charitable giving activity swing into high gear, you may want to take a look at donor-advised funds. These funds allow an individual to make donations to an IRS-approved 501(c)3 charitable organization in a simple, tax-advantaged way.
The donor-advised fund offers two advantages over direct charitable donations. First, it allows the giver to donate an asset with unrealized gains without liquidating it. Second, it allows the giver to get a charitable tax deduction credit for up to the asset’s full market value. In addition, donor-advised funds offer the giver the ability to advise the sponsor of the fund on how the proceeds from the transferred asset should be invested and the timing of payouts to chosen charities.
A donor-advised fund allows the giver to deduct the full market value of the transferred asset in the year it was contributed in the form of a tax deduction without realizing any capital gain. A donor can make a cash contribution to the fund and deduct up to 50% of his or her AGI. Clients should consult a tax advisor to determine the applicable tax deductibility limits and the ability to carry forward charitable deductions to future tax returns.
The tax-efficient flexibility of donor-advised funds is one of the most attractive features of this investment vehicle and can result in clients making larger-than-anticipated charitable donations. This is especially true of a potential donor who has a long-term holding in an individual stock that has a low cost basis but that has experienced poor performance in recent years—or who feels the stock no longer fits in with the overall portfolio’s objectives. One additional benefit is that if someone owns a “no basis” asset—one where the cost basis is unknown or the paperwork for it is missing—the individual can still donate the asset and claim the full current market value of it as a deduction.
The tax advantages of a donor-advised fund might have particular appeal in 2013 to individuals in higher tax brackets, since the capital gains tax rate has increased this year for higher wage earners (individuals with taxable income of $400,000 or more, or $450,000 for couples filing jointly), rising from 15% to 20% as a result of the American Taxpayer Relief Act of 2012. Separately, a new 3.8% Medicare tax for higher-income taxpayers is now in effect. It generally applies to the portion of a taxpayer’s net investment income that exceeds AGI of $200,000 for individuals and $250,000 for couples filing jointly. An additional incentive to act for some may be if they discover that the imbedded unrealized capital gains in their portfolio are higher than anticipated because of the recent robust performance of the capital markets.
Donor-advised funds today have evolved into a significant source of funding for many charitable organizations. In 2011, donor-advised funds in the United States received over $9.6 billion in charitable contributions. This volume of charitable giving is expected to continue to grow, particularly due to higher levels of participation among young wealthy givers and the recent strong performance of the capital markets. Blueprint Wealth Management can help you determine the best options for you and customize a charitable giving strategy with you. Many of the donor-advised products today require a minimum investment of only $5,000 or $10,000.
Beyond the financial benefits of charitable giving using a Donor Advised Fund there is a true joy to giving charitably. As one who has experienced this joy I have always said you could not pay me enough money to not give it away!! It is true that it is “better to give than to receive.”