The use of donor advised funds is often overlooked as a smart source for your annual charitable contributions.  If you are like most families, you send a variety of annual contributions to a variety of charities that hold your passion.  You send then a check and take the deduction on your tax return.  A more tax efficient method could be to open a DAF account, or build one up with contributions over time, and then make your annual contributions out of the DAF each year to your favorite charities.  This method provides you with tax breaks as you build your fund, instead of each year you send a charity a check. 

The name donor advised fund comes from the process of the owner of the fund advises the fund to make charitable donations each year to their favorite charities.  This is an advisory notice only and the DAF sponsor does not have to do as you advise them to.  Most generally, they do exactly as you advise them to unless doing so would potentially create a regulatory issue like self dealing.  Your financial advisor can continue to manage the funds inside of your DAF.  The advisor just needs to be well versed in building a portfolio to achieve your long term family legacy goals.

Here are the most notable tax breaks for DAFs:

1.  The donor receives and immediate tax deduction in the year they contribute to their DAF.  Since donor advised funds must be administered by a public charity, contributions to a donor advised fund immediately qualify for maximum income tax benefits.  The IRS mandates annual limitations, depending upon the donor’s adjusted gross income (AGI):

• Deduction for cash – Up to 50% of AGI.

• Deduction for securities and other appreciated assets – Up to 30% of AGI.

• There is a five year carry forward for unused deductions.

2.  Capital Gains Avoidance – The donor will incur no capital gains on gifts of appreciated assets (like real estate, securities or other illiquid assets).

3.  AMT – Alternative Minimum Tax – If the donor’s income is subject to AMT, their contribution to their DAF will reduce their AMT impact.

4.  Estate Tax – Your DAF will not be subject to estate taxes.

5.  Tax – Free Investment Appreciation – The investments in the DAF appreciate tax free, providing the donor additional funds that they can use for charitable giving.

Always consult your tax advisor.

Mike Handrick
715-614-8200
mike@handrickplanning.com
www.handrickplanning.com
 
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