Donor Advised Funds

[EA_TAX]

A Client who is over 75 year old, sent me an article from the Kiplingers Retirement Report July 2018 " Mid Year Moves to Rein In Your Tax Tab". This client has many charitable deductions, and with the new tax laws will lose 2% AGI investment expense deductions in 2018, therefore we are discussing tax strategies into the future.

The article suggests there may be a benefit to "bunch charitable gifts" and suggests using a Donor Advised Fund. The example: " You may contribute to the fund this year to get a tax deduction, but you can direct how to give the money to a charity at a future time....instead of spreading out a charitable contribution at $10,000 per year for the next 3 years, you could contribute $30,000 to a Donor Advised Fund this year, itemize your deductions using the $30,000 this year, then take the standard deduction in the next 2 years.Meanwhile you could still dole out $10,000 each year over the next 3 years from the donor advised fund."

I understand the statement up until the last line. I understand the benefit of a $30K itemized deduction in year 1. Maybe I'm missing something but I don't understand what then would be the benefit to dole out $10,000 per year for the next 3 years if the client takes the standard deduction.

Question 1: Has anyone advised a client to use a Donor Advised Fund as listed above? If so, what steps does the client need to take to set up a Donor Advised Fund?

Question 2: In my view, it might be better strategy to advise the Client to set up a QCD, since the client's age is appropriate and the client has IRAs. Would you agree?

Thank you, all thoughts are welcome.

EA_TAX, NY

[kathyc2]

I have some clients that use DAF's. It may be possible for a person to set up their individual one, but most are larger ones already set up by some type of organization. There is not a tax benefit of doling out 10K a year through the fund. The benefit comes from people wanting to keep the money going to the charity fairly even. For years I've been telling people the tax advantage of every other year itemizing but almost always their response is "but the church needs the money every year".

As far as DAF vs QCD, the long term tax savings (both to the client and heirs) would likely be better using QCD's. However, short term, DAF's can provide more tax savings depending on the numbers. QCD will bypass AGI, but DAF's can be used to offset income from sources other than from IRA's.

Depending on how charitable vs leaving money to heirs your client wants to be, another possibility would be a charitable remainder trust.

Also if client wants to leave money to charity upon their passing, from a tax perspective, the money to charity should be coming from IRA rather than NQ accounts to reduce taxable income to heirs.

[EA_TAX]

Thank you very much for your input, it is very helpful.
I'm assuming the DAF is set up by a financial broker.

Thank you.

EA_TAX
NY

[Maude Lebowski]

Donor-Advised Funds

Many of our clients used Donor-Advised Funds. Here's an article about how they work from Schwab's website: https://www.schwab.com/resource-cent...ritable-giving.

I'm not endorsing Schwab. I think most of the big investment firms have Donor-Advised Funds.

Both QCDs and Donor-Advised Funds have tax advantages. Unfortunately, the two can't be combined: you can't make a QCD from an IRA to a Donor-Advised Fund. You can do both, make a QCD and contribute to a Donor-Advised Fund, just not with the same dollars.

Donor-Advised Funds are a particularly good way to donate appreciated stock. The article above shows the difference between selling the stock then donating the proceeds to charity versus contributing the stock to a Donor-Advised Fund.

For your client, a QCD is probably better from a tax point of view. There are more advantages to have a lower AGI (like potentially lower Medicare premiums) than there are being able to itemize, and since the RMD happens every year, the tax advantage is available every year. (Until something changes, of course.)

[EA_TAX]

Thank you, Maude.

EA_TAX
NY

[Burke]

Many of our clients used Donor-Advised Funds. Here's an article about how they work from Schwab's website: https://www.schwab.com/resource-cent...ritable-giving.

This article does not discuss fees, of which I am certain there would be, both for managing the account and for the sale of appreciated securities. Do you know what they would be in general? And I am sure the usual restrictions on charitable deductions on Schedule A (50% of income/AGI for instance, and resulting carryovers) would apply to the taxpayer?

[Lion]

Most churches and charities around here accept appreciated stock donations. No need for a middleman/donor fund. The donor fund works when you want to give a lot at one time/this year but have it go to multiple charities &/or over multiple years &/or you haven't picked your charity yet. If you're giving to one church or charity, skip the fees and ask your church/charity if they'll accept your gift of stock.

[JohnH]

Vanguard is also a good choice to set up a DAF.
They have lots of experience in this area and their fees tend to be the lowest in the industry across the board.

Here's a link with some excellent Q&A's:

https://investor.vanguard.com/search/?query=donor advised funds