Would you like a charitable deduction this year? There can be many reasons why you’d prefer a deduction this year but not actually want to make the distribution until the future:
- Your income is higher this year
- You won’t be able to itemize next year due to decreased deductions
- You are retiring
- You know you are giving, but don’t decide to whom until each year
- You want to retain some control over timing and amount of distribution
- A bird in the hand is worth two in the bush
A donor advised fund is a unique way to donate now and then distribute later. With a donor advised fund, you make a contribution to the fund now. The assets continue to be invested at your direction until they are distributed. The distribution may take place many years after the initial contribution.
Contributions to charities may only be taken up to percentage limits. The most generous of these is for public charities. Since the donor advised fund must eventually be distributed to a public charity, the more generous public charity limitations are used. For example, a donor may make a contribution to the donor advised fund of cash up to 50% of their adjusted gross income (“AGI”), or appreciated securities up to 30% of AGI.
For example, let’s say that Charlie Client can benefit more from a charitable deduction this year because of higher income and the ability to itemize deductions. Charlie gives $2,000 annually to charity. Charlie has a stock which he purchased for $1 a share and which now trades for $200 per share. Charlie contributes 100 shares of the stock, worth $20,000, to a donor advised fund. Charlie has a charitable deduction this year of the $20,000 fair market value of the stock, even though Charlie paid only $200 for the stock. Further, Charlie can deduct the full $20,000 when contributed to the donor advised fund, even though the assets will not be distributed to a charity until the future.
Charlie distributes $1,000 to Charity A and $1,000 to Charity B in the first year, as is his normal. However, he directs the distributions from the donor advised fund rather than writing a check himself. Now, there’s $18,000 left in the fund. In the second year, Charity A has a change in management. Charlie no longer sees eye-to-eye with Charity A’s goals. In the second year, Charlie decides to give $2,000 to Charity B and none to Charity A. In the third year, Charlie discovers Charity C and is enthralled with its endeavors. He decides to give $5,000 from the fund that year to Charity C. He’s now made a total of $9,000 in distributions from the fund. There’s still $11,000 left in the fund for distributions in the future. (This assumes the fund’s performance merely offsets any fees.)
Charlie took the full $20,000 charitable deduction up front in the year in which the contribution was made. There are no additional deductions as the fund balance is distributed to charities. Nor can Charlie decide to take back the funds for himself. The funds must go to a public charity sometime.
There are nearly 285,000 donor advised fund accounts, including over $85 billion in assets. Here is a link to a detailed report of donor advised funds from the National Philanthropic Trust. The largest administrator of donor advised fund accounts is Fidelity Charitable. Of course, each administrator has a minimum to set up an account and minimum fees. (The minimum to start an account at Fidelity Charitable, for example, is $5,000.)
If you would prefer to take a deduction this year, because of higher income this year, or the reduced ability to take a deduction next year, a donor advised fund may make sense for you.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Steve Hartnett
Latest posts by Steve Hartnett (see all)
- The Questions of Estate Planning, Part 3: When - October 15, 2019
- The Questions of Estate Planning, Part 2: What - October 8, 2019
- The Questions of Estate Planning, Part I: Who - October 1, 2019
