Revisiting Donor Advised Funds to Help the Most Vulnerable Charities
It is estimated that the newly passed tax law could result in a reduction of billions of dollars in charitable giving starting this year. Although the long-standing charitable deduction methodology was preserved, overall giving could be significantly hindered due to the new higher standard deduction reducing the number of tax payers who itemize on their tax returns. With so many tax payers waiving the ability to deduct their charitable giving (by claiming the standard deduction), there may be a quantifiable impact on total charitable giving. Smaller charities that truly rely on annual donations to fund their ongoing programs and services could be hardest hit, and they’re the ones that need regular donations the most.
Whether or not one can take advantage of itemizing the charitable deduction, there is still potential tax savings to be had. One of the best ways to achieve this is by using low cost basis securities to complete charitable gifts. Giving these types of in-kind assets directly to qualified non-profit organizations allows the donor to avoid the unrealized, inherent tax liability that would otherwise accompany the outright sale of those appreciated assets. Unfortunately, smaller charities, like many of those that could be adversely impacted by this tax change, may not have the resources or staffing to be able to accommodate such gifts of securities. One way to facilitate this overall objective is the use of Donor Advised Funds (DAFs), which can be used as an effective intermediary to provide cash donations to these smaller recipient organizations.
Donor Advised Funds are defined as philanthropic giving vehicles administered by a qualified public charity. Donors establish DAF accounts at such charities and then make irrevocable gifts into them, either as one-time gifts or in recurring allotments. In the year of any such contributions, the donor can typically take the full deduction subject to income limits, even though the eventual granting out of the DAF can occur over time. Plus, any unused deduction can be carried-forward and applied for up to five subsequent tax years. Upon receipt of a non-cash asset, the public charity administering the DAF will typically turn around and immediately sell with no adverse tax impact to the donor. Finally, the donor’s grant recommendations are distributed out of the DAF via check or cash transfer, both of which are generally easily accepted by charitable organizations, no matter the size or staffing level.
DAFs not only provide philanthropic flexibility and convenience, but they can also help smaller charitable organizations that rely on donations of all types, yet lack the resources to accept and process non-cash gifts. These organizations might be small but they often make a significant impact on our communities, and they face a challenge in maintaining their annual giving dollars. This issue might be more important than ever as we continue to assess the evolving impact of the new tax law on charitable giving, and the unresolved impact of the standard deduction versus itemization.
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