No matter how the 2017 Tax Cuts and Jobs Act (TCJA) may alter your tax planning, we’d like to believe one thing will remain the same: Americans will still give to the charities they choose. After all, financial incentives aren’t usually your main motivation for giving.
That said, a tax break can feel good too, and it may help you give more than you otherwise could. Enter the Donor-Advised Fund (DAF) as a potential tool for continuing to give tax-efficiently under the new tax law.
To be clear, the TCJA did not eliminate charitable deductions. You can still take it when you itemize your deductions. But the law limited or removed several other itemized deductions, and it’s roughly doubled the standard deduction (now $12,000 for single and $24,000 for joint filers). With these changes, there will be far fewer times it makes sense to itemize your deductions instead of just taking the now-higher standard deduction.
This introduces a new incentive to consider bundling your deductible expenses, so they can periodically “count” toward reducing your taxes due. At least in the years your itemized deductions to exceed your standard deduction.
1. Make a sizable donation to a DAF. Donating to a DAF, which acts like a “charitable bank,” is one way to bundle your deductions for tax-wise giving. But remember: DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
2. Deduct the full amount in the year you fund the DAF. Non-profit organizations sponsor DAFs. Your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can grow your giving-power over time.
3. Take part in granting DAF assets to your charities of choice. Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go.
Thus, donating through a DAF is preferred if:
• You want to make a relatively sizable donation for tax-planning or other purposes;
• You’d like to retain a say over what happens next to those assets; and
• You’re not yet ready to allocate all the money to your favorite causes.
Another common reason people turn to a DAF is to donate appreciated stocks in kind (without selling them first) and avoid capital gains taxes. The American Endowment Foundation offers this 2015 “Donor Advised Fund Summary for Donors,” with added reasons a DAF may appeal – with or without its newest potential tax benefits.
Donor Advised Funds aren’t for everyone. Of charitable giving choices, they’re relatively easy and affordable to establish. And DAFs still offer some of the benefits of a planned giving vehicle. They fall somewhere between simply writing a check, versus taking on the time, costs and complexities of a charitable remainder trust, charitable lead trust, or private foundation.
If you decide a DAF is useful to your cause, the next step is to select an organization to sponsor your contribution. Sponsors typically fall into three types:
1. Public charities established by financial providers, like Fidelity, Schwab and Vanguard
2. Independent national organizations, like the American Endowment Foundation and National Philanthropic Trust
3. “Single issue” entities, like religious, educational or emergency aid organizations
However, whether using a professional advisor or managing the selection process on your own, perform due diligence before you fund a DAF. Some key considerations are:
Minimums – Different DAFs have different minimums for opening an account.
Fees – As with any investment account, expect administration fees. Just make sure they’re fair and transparent, so they don’t eat up all the benefits of having a DAF to begin with.
Acceptable Assets – Most DAFs will let you donate cash as well as stocks. Some may accept other assets, such as real estate, private equity or insurance.
Grant-Giving Policies – Some grant-giving policies are more flexible than others. Some single-entity organizations can require a percentage your grants go to their cause. Some have specific rules on the minimum size and/or maximum frequency of your grant requests. And some simplified the grant-making process through online automation.
Investment Policies – As touched on above, DAFs typically invest assets in the market, so they can grow tax-free over time. But some investments are far more advisable than others for building long-term giving power! Can you control investment selections? Some DAFs allow your advisor to manage your account assets. (Note: Higher minimums may apply.)
Transfer and Liquidation Policies – What happens to your DAF account when you die? Some sponsors allow you to name successors if you’d like to continue the account in perpetuity. Some allow you to name charitable organizations as beneficiaries. Some have a formula for distributing assets to past grant recipients. Some roll assets into their own endowment. (Most do this as a last resort if there are no successors or past grant recipients.) Also, what if you decide you’d like to transfer your DAF to a different sponsoring organization during your lifetime? Find out if the organization you have in mind permits it.
Selecting an ideal DAF sponsor for your tax planning and charitable intent usually involves a process of elimination.
If you’re working with a wealth advisor such as RCS Financial Planning, we hope you’ll lean on us to help you make a final selection and meld it into your greater personal and financial goals. As Wharton Professor and “Give and Take” author Adam Grant has observed, “The most meaningful way to succeed is to help others succeed.” That’s one reason we’re here: to help you successfully incorporate the things that last into your lasting, charitably minded lifestyle.