Legacy Planning and Donor Advised Funds
How do you want to be remembered? This is a question that some people consider early in their lives. For others, it’s a thought that never crosses their mind. Some may want their alma mater’s library named after them, or to provide a comfortable life for those they leave behind in the form of seed money for their children to hopefully be successful. Others want to spend their last dime and slide across home plate and into eternity with nothing left over. For those that are charitably minded, leaving money to a favorite program or cause in your Will and Trust is generous, but those that are both charitably minded and tax-aware may want to consider setting up a donor-advised fund.
With the end of 2022 approaching, for the philanthropically minded, now is the time to start thinking about charitable contributions. For investors who plan to make significant donations over time and maximize tax benefits, a donor-advised fund (DAF) may be a viable option. A DAF acts as a charitable investment account that supports one or more of the charities that you care about. They allow you to donate at a time that provides the best tax planning for your family and still direct the funds to the end charities at the pace that is the best fit for your charitable intent. Donors can benefit from an immediate tax deduction when cash or other assets are irrevocably contributed to the fund. Cash contributions qualify for a deduction of up to 60% of adjusted gross income (AGI), while securities such as stocks, bonds, mutual funds, privately held business interests and even cryptocurrencies can take a deduction of up to 30% of AGI. Donating highly appreciated assets with a low-cost basis can be especially valuable because it allows the investor to remove these assets from their taxable portfolio and mitigate the tax hit associated with realizing a capital gain. Once donated, these assets have the potential to grow tax-free, making even more money available to fund your legacy.
You do not have to be a high net worth (HNW) individual to open and fund a DAF. Though different parameters apply based on the investment firm you choose, some initial contributions can be as low as $5,000, with annual administrative fees around .5% to 1%, which can decline as the size of the account grows. These fees are generally less than the operating costs associated with more stringently regulated private foundations (an alternative to a DAF, mostly utilized by HNW individuals) or fees for donating with a credit card.
In 2018, tax law changes that resulted in a larger standard deduction made it less advantageous for some taxpayers to itemize their deductions. Since many investors now take the standard deduction rather than itemize, it can be beneficial to “bunch” charitable donations by making larger contributions in a single year, as opposed to making smaller contributions spread out annually over time. Depending on your other deductible expenses, this can tip the balance of making itemizing preferable to taking the standard deduction in certain years.
Donor advised funds offer flexibility in choosing the number of charities and the amount and timing of each donation. As the donor, you retain an advisory role over these decisions. The main requirement is that each donation must go to a qualified charitable organization as defined by the IRS. Donors also control how the assets are invested. With the help of a trusted financial advisor, these assets can be allocated according to the donor’s risk tolerance and time horizon, much like any number of investment accounts.
By nominating an individual, charity, or both as successor to your donor advised fund, you will ensure that your philanthropic wishes will continue to be met well after you’ve passed on.
Written by author: Jarrod Jacobi | Senior Financial Advisor | AWMA®
Sources:
https://www.morningstar.com/articles/1069431/pros-and-cons-of-donor-advised-funds
https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html
*The foregoing content reflects the opinions of Van Hulzen Asset Management DBA "Van Hulzen Financial Advisors" and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.