Hello everyone. I'm Mike Hengehold. Today, I want to talk to you a little bit about Donor Advised Funds. So, what in the world are donor advised funds? Well, donor advised funds are charitable giving tools that we use in tax planning, and they could be especially relevant this year if the administration gets its way in limiting the tax benefit of itemized deductions. That's one of the things that is in the mix of proposals that Congress is considering. Now, essentially, a Donor Advised Fund is a segregated pool of assets that is committed over the long-term to going to charity at some point in the future.
But the really neat thing is that they allow you to capture a tax deduction today, when it may be more valuable for you, even though the money may not be going to charity for years. Now, the actual gift can go to your favorite charities soon, as I just said, or years down the road, the timing is really up to you. And that's why these are called donor advised funds because you, the donor in this case, decide how the money is to be invested, when the money will be given away, and when it is time to give the money away, you get to decide which qualified charities will receive your money.
Now, this can help with tax planning, especially in situations where your income jumps. For example, in the year you retire, often people receive a lump sum distribution in their final year of work. And if that's the case, your income spikes, your marginal tax rate goes up and it can be helpful to use these types of deductions to help bring your marginal rate down. The same can be said if you get some form of deferred compensation when you retire. In all these situations, it can be beneficial to bring your marginal rate down, and Donor Advised Funds are a great tool for that.
Another common use for these strategies is to implement an itemized deduction bunching strategy. Now, what this does is it allows you to alternate years, one year on one year off, when you take an itemized deduction and when you take the recently increased standard deduction, that's now offered by the government.
And one really cool thing is that you can use appreciated stock that you've held in your brokerage account for more than a year. (That's a detail to pay attention to. It has to have been a long-term capital gain.) Anyway, stock that you've held for a year, you can transfer directly to your donor advised fund without selling. And this means that you pay no tax on the gain, the charity gets the whole thing: you would normally have a stock worth $100. You sell it, you'd pay$ 20 in tax. There'd be$ 80 left to go to the charity. That's not the case here. This way, the charity gets the whole hundred-dollar contribution. Since they're tax free, they get to sell it. They get to keep all the money. And the good part is you get a tax deduction for the full fair market value of the contribution. Had you sold the stock and given the money, you'd only have gotten the deduction for$80. And, as an additional bonus most people are familiar with what's called the wash sale rule, that's a 30-day rule that says you can't reinvest money. If you sell securities for a tax benefit. Well, you're certainly getting a tax benefit here, but the wash sale rules don't apply. If you liked the stock, and you give it to charity, you can buy it right back again to establish your position. You'll be establishing it at a higher basis, which means you'll be saving taxes in the future. And the biggest thing to keep in mind here, though, is that once you contribute the money, even though the money hasn't gone to charity, the money is gone for good. In other words, you can't get the money back, there are no do-overs here.
Administratively, these funds are easy to set up. They're available at all the major custodians. I think Schwab and Fidelity are probably the most accessible for smaller donors because they've done a way with their minimums. I believe that Vanguard still has a$25,000 minimum for initial contributions.
And I believe there's a $5,000 minimum if you just want to add some money to your donor advised fund.
Well, that does it for everything I wanted to say today. If you have any questions or if you want to better understand how this strategy might improve your own tax planning, give us a call.
I hope you've enjoyed this short overview of Donor Advised Funds. Thanks for your time everybody. Bye Bye.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.