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How to Maximize Your Holiday Charitable Giving with Donor-Advised Funds

Are you passionate about giving people opportunities to succeed? If so, you’ll want to know more about donor-advised funds.

As you look back on your life, you remember the hard work it took to get here. But you also recall the opportunities you had along the way. It drives you to provide others with a chance to succeed through charitable giving.

And because you want to make the greatest impact you possibly can - more money to charities you care about, less to taxes - it may be time to open a donor-advised fund (DAF). Read on to learn why.

What is a donor-advised fund (DAF)?

DAFs are organizations that manage and grow funds you have dedicated to charity on your behalf. A common example is community foundations. Schwab and Fidelity also have charitable arms to assist with creating your DAF. 

They differ from private foundations in that there are usually restrictions on beneficiaries. Typically, recipients must be registered 501c3 nonprofit organizations.

How do DAFs work?

You establish a relationship with them that is similar to the one you have with your bank: you make your “deposit,” they invest and distribute funds on your behalf. Control over how the funds are used remains with you.

But unlike with a bank account, once given, the money belongs to the DAF. There are no “withdrawals.”

How much control will I have over my donation?

While the DAF (or, more specifically, the sponsoring organization that manages the fund) technically controls all donated cash or other assets, they generally do with the donation what you as the donor intend. If they didn’t, DAFs would quickly become unpopular!

What are the benefits? Why not give directly to charity?

There are benefits of giving through a DAF for both you and the beneficiary.

1.    You get help developing a charitable plan. 

Gift planning advisors with the DAF will listen to you explain your passion for making a difference and help you make the greatest impact in the lives of people in need.

2.    Charities get more funding. 

 DAFs are responsible investments that pool charitable contributions like yours, grow those funds and make a far greater impact in the community than direct giving alone.

Is donating to a DAF the best way to reduce my tax burden?

 In many cases, giving through a DAF is an ideal way to be charitable when it comes to tax efficiency. For one thing, you can be relatively certain the IRS will acknowledge your gift as deductible. DAFs tend to do a great job providing you with documentation. 

But DAFs are also more likely to accept non-cash gifts than smaller charities you might want to select as the beneficiary. It can provide great tax benefits to donate appreciated securities such as stock or real estate.

How does donating appreciated stock or real estate work?

Gift the Full Market Value

If you have held stock for more than a year and it has appreciated, donating it means the DAF gets the full fair market value and you receive a tax deduction equal to that value. It’s the same with real estate. The fair market value is determined by an independent appraisal.

Avoid Taxes

This is preferable to liquidating first, because that would mean losing 20% to capital gains tax. And, if your modified adjusted gross income (MAGI) is greater than $200,000 ($250,000 if married filing jointly), a Medicare surtax of 3.8% applies as well. The DAF would only get the remainder and you can only deduct the cash gift amount.

Donate Stock After 1 Year

Your greatest tax benefit when donating stock is after you have held it for over a year and it has appreciated. Prior to that point, your tax deduction is limited to the cost basis (the purchase price). And if it has lost value and it still makes sense to get rid of it, it’s usually best to liquidate and claim the loss.

How much can I deduct?

 You can deduct charitable contributions of appreciated long-term assets up to 30% of your MAGI. (The cash limit as of 2018 is 60%, and a donation of a cash/asset mix is 50%.) [1] 

This amount can vary when giving directly to charities depending on the nature and tax-exempt status of the beneficiary. But DAFs tend to distribute funds to recognized 501c3 nonprofits that are truly charitable and more likely to pass under IRS scrutiny.

Consult your tax professional for a more detailed look at how much you can expect to deduct.

The Holiday Season is a Great Time to Open a Donor-Advised Fund

At Lifeguard Wealth, we believe your desire to make a difference should be not only exercised passionately but effectively as well. That’s why we frequently discuss the merits and wisdom of donor-advised funds with our clients.

Because charitable giving is such an important part of the big picture for you and your family’s wealth, don’t put off talking to us. Contact Lifeguard Wealth today.

We look forward to helping you maximize the life-changing potential of your charitable giving.

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The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2019, Lifeguard Wealth