Raskin Planning Group

Charitable Giving: 5 Reasons to Establish a Donor Advised Fund

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Recently, a long-term client was updating their financial plan; they were comfortable with their lifestyle and had enough financial security to help their children and grandchildren. We reviewed their income, expenses, assets and made sure we understood their short-term and long-term goals.

What's next for this family? They have satisfied their personal and family needs. Do they want to make a difference in their community? Is there a charitable organization or issue that is important to them? They have always made annual contributions to charities, but they haven't considered how they could make a larger impact.

Charitable Planning affects tax, investment, estate and income planning and should be integrated as part of a comprehensive financial plan. There are a variety of sophisticated strategies that can help families meet their financial and charitable objectives. Charitable trusts, private foundations and donor-advised funds are some of the available strategies that might be appropriate.

Donor Advised Funds have become the most popular charitable strategy and we recommend that most charitably-inclined families establish one. They offer donors simplicity, flexibility, tax benefits, all at a low cost.

Donor Advised Funds are charitable giving vehicles established by a sponsoring public foundation charity, which makes grants to other charitable organizations, based upon the donor's recommendations.

Simple and Flexible:

A donor can contribute all types of assets to a donor advised fund, including cash, stocks, bonds, real estate and shares of closely-held securities. Assets with low cost-basis are often given to a donor advised fund. When the fund sells the security, the gain is typically tax-free.

After the donor makes a contribution to the donor advised fund, the donor can make a formal "grant request" to the fund. The fund will then send a contribution to the charitable organization in the name of the donor or anonymously.

Most donor advised funds have very low minimums, often $5,000 to $10,000. Many charitable and commercial organizations offer these funds, but some sponsors are more flexible than others.

Low Cost:

There are no legal costs to establish a donor advised fund and they can be established very quickly. You won't incur any additional ongoing accounting or legal fees. Typically, the donor advised fund will charge a small annual administrative fee as a percentage of assets. These costs are usually withdrawn directly from the assets of your fund.

Tax Advantages:

Donors receive an immediate tax deduction in the year they contribute to their donor advised fund. The IRS does have annual limitations depending upon the donor's adjusted gross income (AGI) and the asset that is gifted. Deductions for cash gifts are limited to 50% of AGI. Deductions for securities and other appreciated assets are limited to 30% of AGI. There is a five-year carry-forward for unused deductions.

The family discussed above should consider establishing a donor advised fund. They have highly appreciated securities, as well as a charitable intention, and they might want to use the donor advised fund as part of their overall estate and charitable plan.

Here is an example how the donor advised fund can help this family meet their objectives: This is a year they will have significant taxable income. They suspect their income tax bracket will be highest this year and less in future years. They could make a sizeable tax deductible charitable contribution in this year by contributing some highly appreciated securities to a donor advised fund. They will avoid paying capital gains tax on the securities and they will take the tax deduction in the year they are in the highest tax bracket and spread their charitable giving over a few years.

They also have a very large IRA account. They might consider naming their donor advised fund as a beneficiary of a portion of their IRA. Their children can become involved with family grantmaking now. When both parents are deceased, the amount remaining in the IRA will be gifted to the donor advised fund. The IRA would be fully-taxable to the children but because it is donated to a donor advised fund, the children don't have to pay income taxes on the gift. The children and grandchildren can continue to make grant requests. This becomes a memorable legacy for the family.

Charitable planning can be a wonderful and inspiring part of an overall financial plan. We find that it truly makes a difference to a family and their community. The donor advised fund is just one of many strategies that should be considered. Please call us at the Raskin Planning Group if you have questions.

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