New Tax Law Will Cause the Generous to Get Creative

The Tax Cuts and Jobs Act of 2017 (TCJA) has made many significant changes to how an individual’s tax return will look for 2018. Of these, the substantial increase in the standard deduction has put charitable organizations and their donors in newfound territory. According to the Tax Policy Center, 21 million Americans will no longer file an itemized deduction and will therefore lose any tax benefit from donations they may make.

Example: Tim and Toni are a married couple who tithe $12,000 per year to their local church and have $10,000 of other bottom-line deductions, bringing their total deductions to $22,000. In 2017 they would have itemized and enjoyed tax benefits related to their giving; however, in 2018 they will instead claim the new $24,000 standard deduction for married couples filing jointly whether they decide to give to their church or not.

There is however one possible solution for those finding themselves in this charitable giving limbo: The donor-advised fund. A donor-advised fund (DAF) acts as a pit-stop between yourself and the charities to whom you give, effectively separating the point when your charity receives the funds and when you take your deduction. Any funds that get placed into the DAF receive an immediate tax deduction; however, the when, how much, and to whom are all up to you. Moreover, the DAF does not necessarily need to receive cash, it can receive appreciated securities or even real estate. Given the fact that our bull market has recently celebrated its 9th birthday, many buy & hold investors may be sitting on large unrealized gains in their taxable portfolios. By transferring these securities rather than cash, the unrealized gain on those positions are bypassed completely. Future gains on funds now inside the DAF will accrue tax-free as well. Thus, clients may realize the following benefits of setting up a DAF:

Deduction
Capital gains elimination
Tax-free growth.

What’s the catch?

The DAF strategy is usually most appropriate for the generous, but not too generous donation due to its tax deduction limitations: 50% of adjusted gross income for cash gifts and 30% of adjusted gross income for appreciated securities. Also, remember that the assets in the donor-advised fund must eventually go to charity and therefore cannot be inherited by individuals or family members.

What is involved when setting up a Donor Advised Fund?

Unlike some charitable giving strategies that require the use of a trust (and therefore the help of an attorney), a donor-advised fund can be viewed as a bit more user-friendly. The paperwork process is typically not much different than setting up your average brokerage account. Once cash and/or securities are transferred into the DAF they are often rebalanced, usually into low-cost mutual funds to suit time horizon and risk tolerance. Account minimums, administrative fees, and investment options will differ from provider to provider and need to be considered.

Other benefits…

Since the money in a DAF cannot pass to heirs, it offers a particularly great opportunity for parents and grandparents to teach the next generation about charitable giving. Some of our clients have used a DAF as an opportunity to organize family meetings and allow children to help decide which charities they would like to give to and discuss why. Bringing them close to the action gives them exposure not only to your family’s core values and the virtues of giving, but also to the importance of money management as well. By giving kids and teens a ‘charitable allowance’ they can better understand how budgeting, prioritizing, and giving all function together. And who knows, you may have a future private foundation portfolio manager on your hands.

Of course, these benefits are all based on the presumption that the donor-advised fund is appropriate in the first place. Other vehicles such as irrevocable life insurance trusts, charitable lead trusts, charitable remainder trusts, etc. all have their time and place and need to be taken into consideration before determining the proper route to take.

Blackwell Boyd Wealth Management does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

No content published here constitutes a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. To the extent any of the content published may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Consult your advisor about what is best for your situation.