Donor – Advised Funds: A Tax Planning Tool for a Church and Charity Donations
By Do you give money to your church?
Do you get a tax benefit from those donations?
How about your donations to other charities?
Recent changes in the tax code have done much to destroy your benefits from church and other tax-deductible 501(c)(3) donations. But there’s a way to donate the way you want, get revenge on the tax code, and realize the tax benefits you deserve.
This get-even tool is the donor-advised fund, an increasingly popular way to donate to your church and other 501(c)(3) organizations. Indeed, donor-advised funds have exploded over the past few years, with over one million donor-advised fund accounts in existence as of 2020.
Example. You donate $100,000 to the fund today. You get the $100,000 deduction now. From the fund, you donate $10,000 a year to your church (probably more as your money in the fund grows tax-free).
National investment firms such as Fidelity, Schwab, and Vanguard have all created donor-advised funds. These “commercial” donor-advised funds hire an affiliated for-profit investment firm to manage the assets in the accounts for a fee that varies based on the account balance.
You can also establish a donor-advised fund account with a community foundation that has a local orientation; a single-issue non-profit, such as a university or an environmental charity like the Sierra Club; or an independent, non-commercial organization such as the American Endowment Foundation, National Philanthropic Trust, or United Charitable.
You can always donate cash, including money in IRAs and 401(k)s, to your donor-advised fund account. But many donor-advised funds also accept non-cash donations, including
stocks, bonds, and mutual fund shares,
real estate,
privately owned company stock,
LLC and limited partnership interests,
Bitcoin and other cryptocurrency, and
life insurance.
Donating stock or mutual fund shares that have appreciated is a great tax strategy. Here’s why:
If you owned the stock for more than one year, you get a deduction equal to its fair market value at the time of the donation.
And you don’t pay any capital gains tax on the appreciated value of the stock.
Example. Darius owns 1,000 shares of Evergreen stock that’s publicly traded on NASDAQ. He paid $10,000 for the stock back in 2010, and the shares are worth $100,000 today.
He establishes a donor-advised fund in 2022 and donates the stock.
He gets a $100,000 charitable deduction for 2022.
He pays no federal tax on his $90,000 gain.
As you can see, there are many benefits to donor-advised funds for the charitably inclined, and few drawbacks. If you would like to discuss donor-advised funds, please don’t hesitate to call me on my direct line at 408-778-9651.