Charitable Giving Under New Tax Laws

Posted by:

No matter how the 2017 Tax Cut Jobs Act (TCJA) may alter your income tax planning, we’d like to believe one thing will remain the same: With or without a tax write-off, many Americans will still want to give generously to the charities of their choice. Nevertheless, it has been estimated charitable giving will be hit hard by the new tax law and donations might drop by $14 billion.

What’s Changed?

To be clear, the TCJA has not eliminated the charitable deduction. You can still take it when you itemize your deductions, but the new law has limited or eliminated several other itemized deductions that impact the ability to take the charitable deduction. It roughly doubled the standard deduction (now $12,000 for single and $24,000 for joint filers) producing far fewer times it will make sense to itemize your deductions instead of just taking the now-higher standard allowance.

This introduces a new reason to consider bunching deductions, so they can periodically “count” toward reducing your taxes – at least in the years you have enough itemized deductions to exceed your standard deduction.

For example, if you usually donate $2,500 annually to charity, instead you could donate $25,000 once every 10 years to a donor advised fund (DAF). Combined with other deductions, you might then be able to take a nice tax write-off that year, which may generate (or be generated by) other tax-planning possibilities.

Donor Advised Fund (DAF)

The DAF is a potential tool for continuing to give meaningfully and tax-efficiently under the new tax law. DAFs are not new; they’ve been around for over 80 years but they’ve been garnering more attention as a potentially appropriate tax-planning tool under the TCJA. A DAF isn’t for everyone.  Along the spectrum of charitable giving choices, they’re relatively easy and affordable to establish, while still offering some of the benefits of a planned giving vehicle. As such, they fall somewhere between simply writing a check, versus taking on the time, costs and complexities of a charitable remainder trust, charitable lead trust, or private foundation.

Here’s how they work:

  1. Make a sizeable donation today. Donating to a DAF, which acts like a “charitable bank,” is one way to bunch up your deductions for tax-wise giving. But remember: DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
  2. Deduct the full amount in the year you fund the DAF. Receive a tax deduction now; DAFs are established by nonprofit sponsoring organizations, so your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, assets are invested and grow tax-free. This can give your initial donation more giving-power over time.
  3. Participate in granting DAF assets to your charities of choice. Over time, you exercise discretion about when the assets will finally leave the DAF and actually go to the charity of your choice subject to sponsoring organization and IRS rules. The investment choices may be limited but ultimately assets in a DAF are meant to be distributed to a charity.

Thus, donating through a DAF may be preferred if you want to make a relatively sizeable donation for tax-planning or other purposes; you’d like to retain an input over what happens next to those assets; and you’re not yet ready to allocate all the money to your favorite causes at once.

Other common reason people turn to a DAF:

  1. To donate appreciated stocks in kind (without selling them first) thus avoiding a capital tax recognition. – The DAF may be used as a “conduit”, where the appreciated securities are donated to the donor-advised fund, which liquidates the investments (tax-free at that point), and then subsequently makes a cash grant out to the intended charity.
  2. To make anonymous gifts – facilitate the donation to the charity on an anonymous basis.
  3. To teach children responsible giving habits – under family supervision and guidance children play an active part in the decision about how much to grant and to which charitable organizations.
  4. A legacy family giving vehicle – allowing assets to grow and compound tax-free indefinitely to support future family charitable giving.

How Do You Differentiate DAFs?

If you decide a DAF would be useful to your cause, the next step is to select an organization to sponsor your contribution. Sponsors typically fall into three types:

  1. Public charities established by financial providers, like Fidelity, Schwab and Vanguard.
  2. Independent organizations, like your {local} Community Foundation or a national organization like the National Philanthropic Trust.
  3. “Single issue” entities, like religious, educational or emergency aid organizations

Within and among these categories, DAFs are not entirely interchangeable. Whether you’re being guided by a professional advisor or you’re managing the selection process on your own, it’s worth doing some due diligence before you fund a DAF. Here are some key considerations:

Minimums – Different DAFs have different minimums for opening an account. For example, one sponsor may require $5,000 while another $25,000 threshold to get started.

Fees – As with any investment account, expect administration fees. Just make sure they’re fair and transparent, so they don’t eat up all the benefits of having a DAF to begin with.

Acceptable Assets – Most DAFs will let you donate cash as well as stocks. Some may also accept other types of assets, such as real estate, private equity or insurance.

Grant-Giving Policies – Some grant-giving policies are more flexible than others. For example, single-entity organizations may require that a percentage of your grants go to their cause, or only to local or certain kinds of causes. Some may be more specific than others on the minimum size and/or maximum frequency of your grant requests. Some have simplified the grant-making process through online automation; others have not.

Investment Policies – As touched on above, your DAF assets are typically invested in the market, so they can grow tax-free over time. But some investments are far more advisable than others for building long-term giving power! How much say will you have on investment selections? If you’re already working with a wealth advisor, it can make good sense to let your advisor help select these account assets in a prudent, fiduciary manner.

Transfer and Liquidation Policies – What happens to your DAF account when you die? Some sponsors allow you to name successors if you’d like to continue the account in perpetuity. Some allow you to name charitable organizations as beneficiaries. Some have a formula for distributing assets to past grant recipients. Some will roll the assets into their own endowment. (Most will at least do this as a last resort if there are no successors or past grant recipients.) Also, what if you decide you’d like to transfer your DAF to a different sponsoring organization during your lifetime? Find out if the organization you have in mind permits it.

Deciding on Your Definitive DAF

Selecting an ideal DAF sponsor for your tax planning and charitable intent usually involves a process of elimination. To narrow the field, decide which DAF features matter the most to you, and which ones may be deal breakers.

If you’re working with a wealth advisor lean on them to help you make a final selection, and meld it into your greater personal and financial goals. As Wharton Professor and “Give and Take” author Adam Grant has observed, “The most meaningful way to succeed is to help others succeed.” That’s one reason we’re here: to help you successfully incorporate the things that last into your lasting, charitably minded lifestyle.

Disclaimer:
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change. Content should not be viewed as personalized investment advice or as an offer to buy or sell the securities mentioned. A professional advisor should be consulted before implementing any of the strategies presented.
Hyperlinks on this website are provided as a convenience and we disclaim any responsibility for information, services or products found on websites linked hereto. Any links to third party websites are offered only for use at your own discretion.
Tobin Investment Planning LLC is registered as an investment advisor and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. The firm is not engaged in the practice of law or accounting.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark. Past performance is not an indicator of future results.

0
  Related Posts