Raising more money for charity—what could be wrong with that? One of the hottest new investment trends for individuals is Donor-Advised Funds (DAFs). These philanthropic funds offer amazing tax benefits and have drastically changed the landscape for charitable donations. However, do they really have the charities’ best interests in mind? Let’s look at the facts, and you can decide for yourself.
What Are Donor-Advised Funds?
DAFs are accounts that allow investors to deposit money (or assets) they wish to donate and invest it as they see fit. The investments then grow tax-free until the donor decides which charity they’d like to send the funds. Funds can be allocated all at once or deposited to the charitable organization as the donor feel appropriate. DAF funds have skyrocketed in recent years, with total assets almost tripling from 2010 to 2016.
The Advantages Of DAFs
In an ideal world, DAFs benefit all parties involved: investors and charities.
The investors who benefit most from DAFs are those who possess “appreciated stock or illiquid complex assets.’” In fact, non-cash assets made up over 80% of contributions in 2017. (1) This is because donating these assets to a DAF allows for significant tax benefits compared to selling the asset or donating it directly to a foundation. By investing these illiquid assets into DAFs, the donor receives a higher income tax deduction (up to 10% greater than the cap for foundations) and neither the donor nor the DAF must pay capital gains tax when the asset is sold. Also, if you need the tax benefit of charitable giving but not sure who to give the funds, DAFs allow for the tax credit of the investment but complete control until the donor selects the appropriate charity.
The charities themselves benefit because as the fund grows, so do the eventual donations. In fact, the Fidelity Charitable 2018 giving report shows that DAFs have generated an increase of $6 billion donatable funds since inception. However, there is just one problem…
As investors have assets within their accounts that have appreciated over the past several years often “letting go” of the asset may be difficult. Letting their assets sit in their DAF allows for continued growth but an immediate tax credit too. That doesn’t sound so bad, right? It means more money eventually for charities.
Donor-Advised Funds have the potential to be a win-win-win situation. Investors enjoy tax benefits, and charities receive more donations. The key is being proactive and making the donation by year-end to benefit from this opportunity. The 2017 Tax Cuts and Jobs Act has limited many deductions for residents in States like California; however, the limits for charitable donations have increased to 60% of adjusted gross income (AGI) for cash donations and 30% of AGI for appreciated asset donation remained the same. Appropriate planning for charitable donations and Donor Advised Funds (DAF) is more important than ever under the new tax law.
So, if you’re interested in learning more about DAFs to see if they might be the right option for you, contact our office today by calling us at (323) 254-3072. We can work with your tax professional and come up with a Plan.
About Mason & Associates, Inc.
Mason & Associates, Inc. was founded in 1989, specializing in Life Planning for individuals, families and small businesses. Life Planning places a person’s core life values at the heart of the advice process and focuses on the human aspects of financial planning.
As a client, your personal story is key to our planning process. That is why we strive to build a close relationship that will encompass every aspect of your life. Together with our team of professionals, we guide you through the process of identifying what is important to you, your goals, your dreams. We then put into place a financial roadmap to set you on your way towards achieving your objectives.
Our responsibility does not end there. As you encounter bumps in the road, changes in goals or any other roadblocks, we are there to offer advice and guidance. We are there to celebrate your successes and cope with your challenges. We work alongside your other professionals such as your attorney and your CPA to be sure all of your legal and financial needs are aligned.