Your clients rely on you for devising tax strategies that are advantageous to them, not only this year, but also for years to come. Having worked with advisors for more than 40 years, we know that charitable giving can be an essential component of a client-favorable tax strategy. It involves establishing a donor-advised fund and determining if bunching multiple years’ worth of charitable donations in one year to that fund makes sense for your client’s tax situation. In many cases, bunching donations in a donor-advised fund is a savvy tax-savings strategy.
A Quick Refresher on Donor-Advised Funds
Donor-advised funds are charitable giving accounts that grow tax free. Donor-advised funds make charitable giving easy, efficient and rewarding without excessive rules or limitations.
Four key points:
- If a fund’s assets exceed $100,000, you can manage the assets on your own platform, along with the rest of your client’s financial portfolio. Or, your client can invest the assets in our low-cost investment pools.
- Your clients contribute cash, stock or other complex assets to the fund and their charitable dollars grow tax free.
- Your clients have online access to their donor-advised fund and are able to request grants, track the fund’s charitable activity and access monthly fund statements.
- Your clients can name successor advisors to their fund, involving future generations in their charitable goals and giving, allowing you to establish and foster connections with the next generation through your clients’ charitable legacies.
To Whom Might Donor-Advised Funds Be Attractive?
The reasons your clients give are varied, often personal and rarely boil down to one. You know your clients’ financial situations better than anyone. However, what you might not know are personal events that shape their philanthropic views. We often work with individuals and families who:
- Believe it’s important to create a legacy for future generations
- Are passionate about specific causes, for example those whose lives were affected by a disease, and want to strategically support them beyond making a one-time or occasional donation
- Can benefit from a charitable tax deduction now with the flexibility to make distributions in the future
- Want to grow their contributions tax free over time
- Are nearing or in a transition phase of life – empty nest, nearing retirement, involved in estate planning
- Plan to sell a private company
- Are holding appreciated assets (publicly traded securities or other complex assets) and face high capital gains tax
- Are private about their wealth and/or giving
- Are too busy to handle or prefer to be hands-off on the administrative side of giving
For helpful tips on how to open a dialogue with your clients about charitable legacies and donor-advised funds, download our Advising Across Generations guide.
How Bunching Donations in Donor-Advised Funds Works
Your clients can bunch multiple years’ worth of donations to a donor-advised fund in a single year. The benefit is that they receive maximum tax benefits for their charitable contributions.
Why would your clients want to bunch donations? Gifts to donor-advised funds are tax deductible, so they can combine two or three years of charitable contributions in one calendar year in order to exceed the standard deduction in that year. They can then use the assets in their donor-advised fund to consistently support their favorite charities, even in years when they take the standard deduction.
The following chart shows how a married couple, filing jointly, who typically gives $5,000 a year to charity can benefit from bunching. In this example, they bunch three years of $5,000 donations into one $15,000 donation every three years. In this case, the couple itemizes in years one and four and takes the standard deduction in years two, three, five and six, overall decreasing their tax liability.
Your clients might be concerned that bunching their charitable contributions to their donor-advised fund means they can only grant donations to their charities of choice in those years. That is simply not the case. Your clients can continue requesting grants from their donor-advised fund anytime they want. Another advantage of granting from their donor-advised fund is that there is one receipt at year’s end for charitable donations made, which simplifies tax return preparation.
Interested in learning more about if bunching is right for your clients’ tax strategies this year? It’s never too early to start planning. Contact our experts to discuss the details so you can weigh the pros and cons.