Rockefeller Foundation, Ford Foundation, The Gates and Sam Walton are some of our country’s great philanthropists. Their giving was built on the growth of their charitable assets via private foundations, not on their big checkbooks. Today, your last name doesn’t have to be synonymous with the ultra-wealthy to have a charitable investment account. Anyone can be a philanthropist using a very simple tool called a donor-advised fund.
How Donor-Advised Funds Work: Give, Grant, Grow
Donors give to donor-advised funds and take those donations as their charitable deductions. The funds in these charitable investment accounts are invested and grow tax free. All the while, donors can make grants from their funds to nonprofit organizations that mean the most to them.
Five Tax-Smart Ways You Can Give to a Donor-Advised Fund
People across the economic spectrum are using donor-advised funds to grow their own pot of charitable assets so they can give more. If you’re curious about how people fund their charitable investment accounts, consider the following five tax-smart ways to do so.
- Maximize your charitable deduction during high-income years.
From changing jobs to working on a commission basis, there are many reasons annual income fluctuates. Life is happiest living in the middle, not the highs and lows. Planning for the high years can include charitable giving, and giving to a donor-advised fund is a smart way to stay in the middle. In the high-income years, you can contribute to your charitable fund and take your charitable deduction at the highest brackets. The donation is invested, and you can grant it from there.
- Donate appreciated assets.
As personal investments grow, you can start giving stock instead of cash to your donor-advised fund during high-income years.
When you give $1,000 in cash to your donor-advised fund, you have a $1,000 tax deduction. You’re also probably contributing money to other investment accounts. As those investments grow and mature, you’re experiencing long-term capital gains.
In your later years, you can donate appreciated assets to decrease capital gains. For example, if you give stock worth $1,000 with a basis of $600, you get a $1000 full fair market value deduction. Plus, you avoid long-term capital gains tax on that $400 of gain. You can sell it tax free in your donor-advised fund, reinvest it, and let it grow tax free.
- Take advantage of employer contributions.
Whether part of a corporate social responsibility plan or a benefits package, there are companies that contribute to their leaderships’ donor-advised funds. This is their way of supporting employees’ or executives’ involvement in supporting their communities. Making a charitable contribution of company dollars to their executives’ donor-advised funds makes tax sense for the company, and it is a highly valuable part of an executive benefits package.
If your company makes contributions to employee donor-advised funds, take advantage and use that money to support causes that are important to you in your community.
- Offset taxes from selling a business.
If you have equity in a business, before you sell, think about giving some of that closely held stock to your donor-advised fund to offset taxes on the sale. Depending on the business’s structure, you may be able to avoid capital gains. Most importantly, it feels good to take some of what you worked so hard to build and turn it into charitable assets. It is a way to give back to the universe that supported you in your success.
- Giving and receiving a charitable inheritance.
You want to leave behind an estate for your family in the form of charitable assets. You can give just about anything from your estate to a donor-advised fund, but some assets are smarter than others. IRAs are the most expensive assets to inherit. The inheritors not only have estate taxes to pay, but IRAs are loaded with income tax. So, rather than inheriting an IRA and getting cents on the dollar, it can go to a donor-advised fund estate and be income tax free, dollar for dollar. Though the tax laws aren’t favorable for giving IRAs to a donor-advised fund during your lifetime, it is a really smart move upon death.
The Magic of a Donor-Advised Fund in Action
Imagine giving a little more than $400,000 over a 15-year period in very tax-wise ways to a donor-advised fund. The magic over those 15 years happened in the form of grants to charity. Realistically, you could give more than $200,000 in grants to causes you care about most in your community, some years giving a lot and some years less. All the while, your fund is invested and growing tax free, making it worth more than $500,000.
Bottom line: $400,000 turned into $200,000 worth of grants and a donor-advised fund worth over $500,000. Perhaps in the future, you can leave what’s in the fund to family, who can continue your legacy of giving.
You can add zeros or take away zeros, depending on your financial circumstances. The point is that there are people using donor-advised funds to the benefit of themselves, their communities and their heirs.
Of course, you can give out of your checkbook or PayPal or Venmo account. However, by giving in smart, tax-saving ways and letting time help your charitable investment account grow, you can accomplish so much more with your charitable dollars.
Greater Horizons’ philanthropic advisors work with individuals and families to maximize and organize their charitable giving. They make giving easy and will work with you to develop a solution to meet your needs.