It’s the season of giving, and high-net-worth estates can benefit from tax-efficient charitable planning to make donations count for this tax year.
With the holiday season rapidly approaching, year-end charitable donations have entered the conversation. You might even find yourself searching: If I donate $10,000, how much of a tax refund will I get? Your Dedicated Fiduciary® founder, Vance Barse, is proactive in helping our trusted families implement tax-smart charitable planning strategies.
In this Wealth Management article, Vance Barse, CPWA®, AIF®, breaks down the multiple ways individuals, families, and businesses can make their donations count.
“One of the benefits of serving high-net-worth estates is the opportunity to implement purpose-driven philanthropy and observe the fulfillment it brings families with charitable intent—regardless of size.”
Charitable Giving Overview
More often, philanthropy begins and ends with passion and purpose. However, many charitable donors default to writing checks to support their favorite charities. The team at Your Dedicated Fiduciary, however, implements tax-smart charitable giving strategies to maximize your charitable contribution deduction. One such strategy is a Donor-Advised Fund (“DAF”).
”Charitable deductions are generally equal to the asset’s fair market value on the day the charity takes ownership of the asset, unless the asset has short-term appreciation. For a short-term appreciated asset, the deduction is equal to the basis.”
How Donor-Advised Funds Eliminate Capital Gains Tax
One of the most popular yet underrated tax-smart strategies for maximizing your charitable deduction is a Donor-Advised Fund (“DAF”).
What Makes Donor-Advised Funds Attractive
According to Barse, a donor-advised fund is a popular vehicle with several points of intrigue. The donor-advised fund allows donors to “bunch” future years’ charitable intent by contributing highly appreciated, non-qualified assets such as stock or expensive and tax-inefficient mutual funds, creating a tax-smart alternative to donating cash.
There’s an immediate deduction for the value of the investments donated to the DAF and there’s no capital gains tax due on highly appreciated holdings that are donated to the DAF. Once the investments are in the DAF, they can be sold to cash to then immediately donate to your favorite charities or invested in a portfolio for future potential growth. Further, there’s no grant requirement for a minimum distribution, meaning there is no requirement to give a certain percentage from the DAF, and you can re-purchase the same investments that were donated without violating the wash sale rule.
Tax-Smart Strategies for High-Net-Worth Families
An appealing feature of donor-advised funds is the ability to honor the family legacy, for example, “The Smith Family Charitable Giving Fund.”
Personalized naming of the fund can create a lasting charitable identity while applying maximum tax advantages that DAFs allow.
Building a Multi-Generational Giving Plan
Beyond the immediate tax benefits, donor-advised funds serve a deeper purpose. Donor-advised funds can be used to foster familial unity by teaching core money and philanthropic values to the next generation. Therefore, the next generation can confidently serve as successor trustee(s) for future disbursements to charities of their choice.
Bottom line, the biggest takeaway about donor-advised funds boils down to knowing how this tax-smart donation strategy works. Donors receive tax benefits in multiple ways, making donor-advised funds both tax-efficient and meaningful for multi-generational planning. And yes, for those of you wondering, both appreciated investments and cash can be donated to a DAF:
- Deduction up to 30% of AGI for highly appreciated, non-qualified assets
- Deduction of up to 60% of AGI for donating cash
“This vehicle can also be used to foster familial unity by teaching core money and philanthropic values to the next generation, who can serve as successor trustee for continued disbursements to charities of their choice”
Generally, a donor-advised fund is easier to manage and has lower costs than a family foundation, with higher adjusted gross income (AGI) caps, making DAFs attractive and accessible to more families.
Year-End Tax Planning: Taking Action Before December 31
With year-end approaching and the stock market near all-time highs, now is the time to evaluate charitable planning strategies that can maximize your impact for this tax season. Donor-advised funds offer a powerful solution if you’re looking to reduce your tax burden while supporting the charities you care about.
Contact Your Dedicated Fiduciary® to explore how tax-smart charitable vehicles can benefit your estate.
Additional Resource: Download this DAF Overview Guide from Ren Inc. for comprehensive details on how donor-advised funds work.
DISCLAIMER STATEMENT: Generally, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it; however, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.