Donor-Advised Funds test
There are multiple ways for Christians to express their charitable inclinations. How you choose to do so can have vastly different implications, and as a Christian financial planner, I help clients determine how giving can improve your tax situation and fit within your overall financial plan. In this article, we will explore the use of donor-advised funds to give money and its benefits.
Everyone is familiar with the most basic way to give: sending money to a church or charity directly using cash, check, or credit card. Some charities also give you the option of donating securities, such as stocks, bonds, or mutual funds. At the end of the year, such an organization will prepare a tax receipt and send it to your home address to prove that you made a tax-deductible contribution to that organization. Alternatively, you can donate goods to organizations like Goodwill or The Salvation Army in exchange for a similar receipt. Wealthier individuals who desire more control and have a substantially higher net worth use other vehicles such as private foundations to control the giving process in exchange for increased costs.
Donor-advised funds stand as a potential option for individuals ready to release control of their funds (for tax purposes) but not ready to hand it over in full to one or multiple organizations. In other words, they have committed to giving this money in their hearts, but perhaps they haven’t decided how to allocate it fully.
What are donor-advised funds?
Donor-advised funds are 501(c)(3) charities, making any transfer of assets immediately tax-deductible. After contributing, your assets legally belong to that fund and can’t be pulled back. The fund, however, allows you to “advise,” which charities should receive grants. Such grants typically have a minimum dollar amount, such as $200 or $500 at a time to reduce administrative costs. All donations must go to 501(c)(3) charities as well, so if you would like to give money in a more personal and direct way to someone in need, a donor-advised fund may not be the answer for you.
The practicality of donor-advised funds changed with the passing of the Tax Cuts and Jobs Act (TCJA) of 2017. The new law doubled the standard deduction for individuals and families, which significantly reduced the number of individuals who itemized deductions on their tax returns. Overnight, the advantage of a tax-deductible contribution for most people seemingly evaporated because they would need to have at least $24,000 of itemized deductions before any charitable contributions reduced their tax bill.
Due to this new dynamic, donor-advised funds became an essential tool of a technique called “bunching.” To maximize the tax benefit of donating to a charity, one could bunch up multiple years of contributions in a single year where the total of those contributions plus other itemized deductions (home mortgage interest, state income taxes) add up to more than $24,000.
When does it make sense to use one instead of giving it directly?
Our Master Class How to Build a Christian Financial Plan covers different ways to give depending on your situation. If, after reading this article, you are wondering how you can get one set up, the good news is that some well-known investment firms such as Fidelity and Vanguard have charitable arms that serve this purpose.
We recommend that you work with a financial advisor familiar with donor-advised funds to set up the account, choose the investments, and help you determine the most advantageous ways to fund it and give over time. If you are ready to get started, let’s talk.
Donor-advised funds are potent tools to combine your charitable aspirations with tax minimization strategies.
Leo Marte is a Christian financial advisor and CERTIFIED FINANCIAL PLANNER™. Abundant Advisors provides financial advice for Christians with convenient virtual meetings. Let’s talk if you are ready to make the next move.