This material was prepared for Simplified Wealth Management’s use.
As tax planning season and end-of-year charitable giving begin, it’s a good time to consider the benefits of donor-advised funds. Charitable giving has many facets, most notably as an opportunity for you to support the causes and organizations that reflect your values. But giving is also a significant tax and financial planning opportunity, helping you increase your impact and potentially save on your taxes.
What is a Donor-Advised Fund?
Donor-advised funds offer similar benefits to a private charitable foundation; however, with a different legal structure and simplified administration, it can make sense for more people.
Donor-advised funds are charitable investment accounts you fund with a donation, which you can then invest as you see fit. A financial planner can help you with the planned investments, as well as take advantage of some other valuable assets. Perhaps most importantly, when you contribute to a donor-advised fund, the contribution is tax deductible in the current tax year.
These accounts may also provide additional tax advantages. Assets in donor-advised funds grow tax-free, are outside your estate, and you can donate appreciated assets, helping you avoid capital gains taxes. You can direct gifts from a donor-advised fund to the charities of your choosing at any time.
The Advantages of Donor-Advised Funds
Donor-advised funds provide a lot of flexibility. Here’s a closer look at some of the big advantages they offer:
- Flexible timing: Using a donor-advised fund allows you to decouple timing decisions for donations and gifts. Donations from the fund to charities can be made over time and at your discretion. For example, say you are in your peak earning years and paying high taxes, you can donate now, take the tax deduction, and wait to make the gift to the charity until later in your life, or even at the time of your death.
- Tax-deductible donations: Gifts to a donor-advised fund are irrevocable, meaning you can’t change your mind and reclaim the assets after a donation is made. However, they are deductible in the tax year in which you make the gift.
- Tax-free growth: Assets in a donor-advised fund can be invested and are not subject to taxes as they grow or at the time of distribution. This tax protection may make a donor-advised fund a more efficient location for assets than a taxable brokerage account, as the tax advantages can help you maximize growth and the impact of your gifts.
- Donation options: You can contribute cash to donor-advised funds, but also to many kinds of appreciated assets, including stocks, mutual funds, cryptocurrency, and certain complex assets, without incurring capital gains taxes. Not all charities are set up to accept gifts of this kind. Appreciated assets can be donated to a donor-advised fund, liquidated without triggering taxes, and the proceeds can then be given away.
- Estate planning: Donor-advised funds also provide a mechanism to remove assets from your taxable estate, which for some people may lower the tax cost for their beneficiaries. Upon your death, your beneficiaries can continue to direct charitable gifts from the account, or the remaining assets can be paid out to your chosen charity.
If you are facing high taxes, estate planning issues, or planning to make charitable giving a part of your financial life, then donor-advised funds can be a useful option with tax advantages and flexibility. Making the most of these funds requires careful planning, especially since gifts are irrevocable. Timing of contributions can have major tax implications, and not all donor-advised funds offer the same costs or services. A financial advisor can help you make the most of these accounts and incorporate a giving strategy into your overall financial plan.
Simplified Wealth Management and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation. Investing involves risk, including possible loss of principal.