Tax Planning under the TCJA: The Donor-Advised Fund

by: Edward J. Leach

Prior to the passing of the Tax Cut and Jobs Act (TCJA) in December of 2017 you likely enjoyed the tax deduction that came with your charitable contributions – no matter the size of the donation. If you lived in a state where you paid state income taxes and had high property taxes you were probably itemizing your deductions (See NJ, NY, CT, and MA – just to name a few).

What the Tax Cut and Jobs Act did do is provide a giant increase in the standard deduction, from $6,300 to $12,000 for single filers and from $12,700 to $24,000 for those who are married filing jointly. However, the Act also capped state and local tax (SALT) deductions to $10,000. As a result, many tax filers will not be itemizing their deductions and will lose any benefit of charitable contributions.

Under the new tax plan, the Donor-Advised Fund has become an even more attractive charitable planning vehicle. Essentially, it allows you to front load several years’ worth of charitable contributions into a single tax year and allows you to realize the benefits from itemizing your deductions. You then have flexibility to pay out your charitable contributions as you see fit from the Donor-Advised Fund.

For example, if you give on average $5,000 per year in charitable contributions you may consider making a $25,000 contribution to a Donor-Advised Fund. This one-time gift of $25,000 would cover 5-years of charitable gifting. The benefit of “bunching” charitable gifts into one year is that you can itemize your deductions to take full advantage of the charitable deduction. You could then distribute $5,000 every year for the next 5-years from the Donor-Advised Fund to your desired charities.

How does a Donor-Advised Fund work?

A Donor-Advised Fund is an account that qualifies as a public charity. A charitable deduction is received at the time of deposit, however, the fund allows you to delay choosing a specific charity or cause to benefit from the funds until a later date. A Donor-Advised Fund lives on in perpetuity as long as there are sufficient funds in the account.

Donors can open accounts at many brokerage firms or large foundations, and make gifts of cash, marketable securities, or even hard-to-value assets.Not all Donor-Advised Funds are created equal – depending on the brokerage firm the cost structure, grant requirements, asset minimums, etc. can all vary.

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For example, the account minimums at Vanguard Charitable vs. the American Endowment Foundation are $25,000 and $10,000 respectively. The minimum contribution at Vanguard is $5,000 whereas the American Endowment Foundation, a partner of our custodian TD Ameritrade, is $1,000. Grant minimums at Vanguard are also higher at $500 per grant vs. $250 per grant at the American Endowment Foundation.

The Benefits

With a Donor-Advised Fund you get an immediate tax deduction when making a contribution, however you do not need to give all of the funds immediately to the charities. The flexible timing of grants allows for those who may have had a high-income year or a liquidation event to front-load a charitable contribution without having to choose causes to give the money too immediately.

For example, Joe and Mary sold their business and as a part of their philanthropic goals would like to carve out $100,000 of the proceeds to give to charity. They just don’t know what charity yet. By funding the Donor-Advised Fund with a $100,000 contribution Joe and Mary will not only be able to get the upfront tax deduction, but also invest the money to grow tax free for the long-term. Every year Joe and Mary decide they will make a total of $3,000 of charitable grants from the Donor-Advised Fund every year – a 3% withdrawal rate. If the funds are invested properly there is a good chance the funds will last Joe and Mary’s lifetime.

This leads to another benefit of Donor-Advised Funds, creating a family legacy of charitable giving. Donor-Advised Funds allow you to name the fund and can accept charitable contributions from family and friends. This is an opportunity for children, grandchildren, extended family or friends to learn about charitable giving.

For example, every year around the holidays Joe and Mary gather their children and grandchildren together to decide what charities will receive a grant from the Donor-Advised Fund.

There is little to no work in maintaining a Donor-Advised Fund, as compared to its counterpart the Family Foundation, which has strict accounting requirements including filing tax forms and annual reports – all of which can be very costly. For a comparison of the main features of the Donor-Advised Fund vs. the Family Foundation click here.

2018 deadlines for opening a new Donor-Advised Fund or making contributions to an existing Donor-Advised Fund are fast approaching. To find out if a Donor-Advised Fund is right for you, and for a comparison of providers please contact the team at HIGHLAND.