Donor-Advised Funds in Advance of Presumed Tax Cuts

Question:  I am reading about possible tax cuts next year and wondering if I should set up a donor-advised fund this year when perhaps my deduction might be more useful.  What do you think?

Answer:  President-elect Trump and the Republican House and Senate are almost certain to make changes to the tax law next year, and they may be retroactive to January 1st, 2017.  So if your tax-saving strategies include timing your itemized deductions, you should consider moving those deductions into 2016, especially charitable contributions and property taxes. Donor-advised funds have been around for a long time and were officially codified into U.S. tax law by the Pension Protection Act of 2006.  That law describes the donor-advised fund as an account or fund that is “separately identified by reference to contributions by a donor or donors, owned and controlled by a sponsoring organization, and with respect to which the donor (or persons appointed by the donor) reasonably expects to have advisory privileges as to the distribution of investments of the account because of his or her status as donor.”

Your first step is to choose a sponsoring organization.  You can establish a donor-advised fund with the Community Foundation for Monterey County and they will help you choose and make payments to qualifying charities of your choice. .  Other non-profit organizations, such as Rotary International, also sponsor donor-advised funds. Some mutual fund companies and brokerage firms sponsor commercial donor-advised fund programs. 

Donor-advised funds offer the following advantages:

  They are similar to a private foundation but without the tax and compliance issues. You can       name it for your family, like “The Rizzo Family Fund.”

  You can support all your favorite charities by making just one donation.

  They are easy to set up and cost efficient.  You won’t need an attorney or a tax professional       to help you (but if a donor-advised fund is part of an estate plan, your attorney and tax             professional should be involved in the process.)

  You can make immediate irrevocable charitable contributions,

  When you contribute to your donor-advised fund, you receive an immediate income tax             deduction up to the maximum allowed by law.  Your tax advisor can tell you how much.

  If you donate appreciated property to the fund, you will receive a tax deduction for the fair       market value of that property while avoiding capital gains tax.

  The fair market value of the property or cash that you donate is removed from your estate         and therefore will not be subject to estate tax when you die.

  You can take your time and recommend grants from the fund to qualified U.S. charities in           future years.

  You can expect to have your contributions professionally managed with the hopes that the       investments will grow and allow you to make even bigger grants from the fund in the future.

  You can set the fund up as an endowment that makes distributions each year and continues in   perpetuity.  This is an easy way to create a family legacy for charitable giving. 

  The sponsoring organization will verify the eligibility of the charity to which you would like to   donate, so you won’t have to.


 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.