Leveraging Tax Advantages When Legacy Planning

Donor-advised funds are an option

When it comes to legacy planning, donor-advised funds have steadily become more popular, according to Citing the National Philanthropic Trust, Investopedia notes that donor-advised funds have become an increasingly efficient method for donating to causes. In 2020, assets held in donor-advised funds rose to $141.95 billion, a 16.2% increase from $122.18 billion in 2018.

The U.S. Internal Revenue Service defines a donor-advised fund as a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. “Once the donor makes the contribution, the organization has legal control over it,” the IRS explains.

In short, donor-advised funds offer the donor greater ease of administration, while still allowing them to maintain significant control over the placement and distribution of charitable gifts, according to Investopedia. “In addition, companies are able to offer this service to clients with fewer transaction costs than if the funds were handled privately,” Investopedia notes, adding, “Donor-advised funds democratize philanthropy by aggregating multiple donors and processing high numbers of charitable transactions.”

Carol ringrose 1“Donor advised funds are a great vehicle,” Carol Ringrose Alexander, CFP®, AIF®, CEPS, CDFA™ and executive vice president at Oklahoma City-based Retirement Investment Advisors told “Advisors Magazine.” “Our family has used one for more than 20 years and I recommend them to clients,” she added. “You can make the gift to the donor-advised fund this year for tax purposes and decide which charity will benefit from it in the future.”

Investopedia points to donor-advised funds’ abundant tax advantages. “Unlike private foundations, donor-advised fund holders enjoy a federal income tax deduction of up to 60 percent of adjusted gross income for cash contributions, and up to 30 percent of adjusted gross income for the appreciated securities they donate,” according to Investopedia.

But for Ringrose Alexander it’s mainly about philanthropy.

“One of my core beliefs is that we have been blessed abundantly and as such, have a responsibility to give back,” she said. “Once you see the world from a place of abundance rather than scarcity, it makes the decision easier. It doesn’t matter if a generous gift for your family is $25 or contains more zeroes, you can determine which cause(s) you care about, research nonprofits making a difference and give.”

Ringrose Alexander explained that for clients who are at least 70 ½ years old, the Qualified Charitable Distribution from their IRA account is an efficient way to give. Giving directly to charity from the IRA account means the donor doesn’t pay income tax on the amount gifted.

“Gifts of appreciated mutual funds or stocks are another useful way to further the mission of your favorite charity,” she said. “By gifting the mutual fund that has increased in value since you purchased it, you avoid paying tax on the capital gain.”

According to Investopedia, the biggest advantage of donor-advised funds is in the immediate tax benefits. One of their biggest drawbacks, however, is that contributions are irrevocable, which means assets cannot be returned no matter the reason.

Karen Asbra1“We like to tell clients that they too can contribute to non-profit organizations just like a billionaire who has their own personal philanthropic fund,” said Karen L. Asbra, CFP®, principal and chief operating officer of Illinois-based Rappaport Reiches Capital Management, LLC.

“With a donor-advised fund, clients can contribute cash or securities like stocks, bonds or mutual fund shares,” she explained. “Many DAFs accept non-publicly traded assets such as private company stock as well. One reminder, once you contribute, you have made an irrevocable gift to charity. No take-backs!”

The IRS also warns it is aware of a number of organizations that may have abused the basic concepts underlying donor-advised funds. Some organizations, promoted as donor-advised funds, appear to have been established for the purpose of generating questionable charitable deductions.

A common criticism of donor-advised funds is that donations can sit in the fund indefinitely. Investopedia cautions that there is no deadline for when assets must be disbursed to charities. Also, unlike private charities, there are fees attached to donor-advised funds as well as a minimum donation.

Carin wagner 3While donor-advised funds may work for many, there are other options when it comes to charitable planning, Carin Wagner, CFP® and vice president of wealth management at Denver-headquartered GHP Investment Advisors, told “Advisors Magazine.”

“We begin legacy planning by asking clients to articulate, either in writing or verbally, their legacy vision,” she explained. “Once we and they have a clear picture of goals — including organizations to support and the extent of desired involvement of future generations — we create a strategy to realize these goals.”

Wagner said her firm may suggest beginning to contribute into a donor-advised fund or a charitable foundation. “We may also consider the creation of trusts for family or charitable use, or we may be able to accomplish the client’s wishes using beneficiaries and strategic titling of assets,” she said. “Regardless of the approach, we always remind clients it is important to create the legacy vision and then use these tools to make the plan work!”


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