Donor-Advised Funds: A Tax Planning Tool for Charitable Donations

Do you give money to your temple, church and other 501(c)(3) charities? Do you get a tax benefit from those donations?

Recent changes in the tax code have done much to limit your benefits from tax-deductible 501(c)(3) donations. But there’s a way to donate the way you want, get revenge on the tax code, and realize the tax benefits you deserve.

This tool is the donor-advised fund, an increasingly popular way to donate to your temple, church and other 501(c)(3) organizations. Indeed, donor-advised funds have exploded over the past few years, with over one million donor-advised fund accounts in existence as of 2020.

Example: You donate $100,000 to the fund today. You get the $100,000 deduction now. From the fund, you donate $10,000 a year to a charitable organization (probably more as your money in the fund grows tax-free).

Commercial Donor-Advised Funds

National investment firms such as Fidelity, Schwab, and Vanguard have all created donor-advised funds. These “commercial” donor-advised funds hire an affiliated for-profit investment firm to manage the assets in the accounts for a fee that varies based on the account balance.

Community Donor-Advised Funds

You can also establish a donor-advised fund account with a community foundation that has a local orientation; a single-issue non-profit, such as a university, hospital or an environmental charity like the Sierra Club; or an independent, non-commercial organization such as the American Endowment Foundation or National Philanthropic Trust.

Cash and Non-Cash Donations

You can always donate cash, including money in IRAs and 401(k)s, to your donor-advised fund account. But many donor-advised funds also accept non-cash donations, including

  • stocks, bonds, and mutual fund shares
  • real estate
  • privately owned company stock
  • LLC and limited partnership interests
  • Bitcoin and other cryptocurrency
  • life insurance

Donating stock or mutual fund shares that have appreciated is a great tax strategy. Here’s why:

  • If you owned the stock for more than one year, you get a deduction equal to its fair market value at the time of the donation.
  • And you don’t pay any capital gains tax on the appreciated value of the stock.

Example: Dennis owns 1,000 shares of Evergreen stock that’s publicly traded on NASDAQ. He paid $10,000 for the stock back in 2010, and the shares are worth $100,000 today.

He establishes a donor-advised fund in 2022 and donates the stock.

  • He gets a $100,000 charitable deduction for 2022.
  • He pays no federal tax on his $90,000 gain. 

As you can see, there are many benefits to donor-advised funds for the charitably inclined, and few drawbacks.

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