Best Charitable Contribution Strategy in 2017

Donor-Advised Funds

Now that we understand in tax planning it is all about timing, let’s look at a strategy to maximize your 2017 charitable contribution deduction.

Under proposed tax reform, it is clear that itemized deductions will change significantly.  For many people this means using the itemized deduction will go away completely. This does not automatically make this a bad change for you. It only changes the way you need to think about structuring your deductions.

The standard deduction might double, which creates a larger tax shelter for you. By utilizing the high standard deduction, you may not contribute enough money to charity to exceed the standard deduction and receive the deduction.

Some experts are expecting that fewer than 5% of all 1040 filers will utilize the itemized deduction in the future. That means 95% of us may need to rethink about how we are donating our money for maximum benefit!

Knowing that and knowing about tax timing, 2017 presents an opportunity. This opportunity is with Donor-Advised Funds.

A Donor-Advised Fund is awesome because it allows you to bunch your charitable contributions into one large donation, while enjoying the ability to distribute to your favorite charities when you are ready.

In other words, you take the deduction today and donate the money to your favorite charity tomorrow.

So what is a Donor-Advised Fund?

The IRS definition of a Donor-Advised Fund is:

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 of assets in the account.

The Donor-Advised Fund is like a savings account. It is an account you fill up for a singular purpose to be used later. Inside this charitable savings account, you can invest the funds any way you would like to. Growth on the money is tax-free. This is allowed because the contribution to the account is irrevocable.

Here is the life of a Donor-Advised Fund:

  1. Contribute money into a designated Donor-Advised Fund
  2. Invest the money
  3. Distribute the money your favorite charities

How do I establish a Donor-Advised Fund?

The core purpose of a Donor-Advised Fund is standard, but when it comes to details of the account, it does vary. There are costs to administer the account based on the amount of money contributed to the account. These costs should be minor compared to the tax savings available to you.

The big players in the Donor-Advised Fund arena are Vanguard, Fidelity, Schwab, and National Philanthropic Trust. You can also look closer to home to community foundations and some faith based institutions.

The minimum initial contribution is $5,000 up to $25,000 depending on the institution. Administrative fees are around $1,000 and on-going investment management starts at 0.6% for the first $500,000 invested.

Why should you use a Donor-Advised Fund?

The primary benefit of using a Donor-Advised Fund is to take advantage of tax timing. In essence, by filling a donor-advised fund you are front loading deductions in a higher year and then make distributions to the desired charities in the future.

This might seem silly on the surface, but when playing the tax timing game it makes perfect sense! You create a donation savings account and continue to donate to your favorite charities each year.

We identified that donation of appreciated stock can be a very beneficial tax strategy. One negative against appreciated securities is that not every charity can accept this type of donation. Smaller charities may not have the means or resources to initiate a security sale transaction. However, the Donor-Advised Fund could receive the appreciated security, subsequently sell the security, and then distribute cash to the small charity!

High net worth families may consider creating a Private Foundation. Unfortunately, creating a Private Foundation comes along with more costs and rules (excise tax, self-dealing, excess business holding restrictions, etc.). Because of that, it may not be beneficial to create one. Instead, the utilization of a Donor-Advised Fund is a much less expensive option in both costs and compliance burden.

Who should open a Donor-Advised Fund?

Anybody seeking to make large charitable contributions should consider utilizing a Donor-Advised Fund. More specifically, those seeking to offset higher than normal income are prefect candidates. A few examples:

  • Sale of a business
  • Sale of highly appreciated stocks
  • Receive a large bonus or deferred compensation
  • Sale of farm or business equipment

If none of those examples apply to you then consider what is on the horizon for tax reform. Do any of these apply to you:

  • Currently have itemized deductions around $25,000 (+/- a few thousand dollars)
  • Donate around $5,000 or more to charity per year
  • Anticipate being in a lower tax bracket under the Trump tax plan

If yes, then any of those reasons could mean the use of a Donor-Advised Fund is the best charitable contribution option in your 2017 playbook.

It is also possible to skip the Donor-Advised Fund and simply make a large donation now. However, there might be some dissatisfaction or angst against not donating any additional money for a few years. The Donor-Advised Fund lets you set the money aside and make the donations each year like you are used to.

Do you want to understand how to make your money work for you and keep more of what you have earned? 

Reach out to me at nbyers@jbcwealthadvisors.com or schedule a free consultation.

___________________________________________________________________________________________

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Nate Byers a Madison, WI CPA Financial Advisor,  and all rights are reserved. Read the full Disclaimer in the footer below.