By Alex Oliver, CFP, CRPF, Wealth Advisor – First National Corporation
With Giving Tuesday on the horizon and as you make your final gifts for 2020, I want to suggest an increasingly popular tool for your charitable contributions.
First, it should be emphasized that cash is the least efficient asset that you can donate and should only be used for small donations. Second, you should also be reminded that charitable deductions do not help your tax situation unless you are itemizing deductions. This means that you are claiming deductions above the standard deduction figure ($12,400 for single filers, $24,800 for married filers).
As such, the Donor Advised Fund has become a common way to help address these issues. This can be set up at Schwab, Fidelity, Vanguard etc. – typically wherever you have your investment accounts currently. The main goal is to donate appreciated stocks into the Donor Advised Fund. Let’s say you had invested $10,000 into Apple and it grew to $15,000. Your donation would get you a $15,000 deduction and you would avoid capital gains taxes on the $5,000 gain (typically 15% or 20%). This is much better than donating $15,000 in cash and especially beats selling the stock to incur the capital gain.
You can then initiate a donation directly from your Donor Advised Fund to the 501(c)(3) organization of your choice, but you don’t have to do this immediately. The account can stay there as long as you live if you wish to parse out donations at a slower pace over the years, letting your investments grow tax free. Some will “bunch up” their charitable donations in one year ($50,000 today instead of $10,000 for five years) so they can itemize this year and claim the standard deduction for the next four years.
A common scenario I am running into is for my clients who are within five years of retirement. We have implemented a financial plan that ensures they will not run out of money during retirement, but inevitably, some realize their asset base is large enough that we have to make a decision: how much do we want to leave to our heirs vs. how much do we want to give to charity over the next 30 years.
If that becomes clear, I emphasize that you will get the best bang for your buck by making charitable donations now, while still working and in a high income tax bracket, than waiting for your 80’s and 90’s when your tax bracket will be much lower. Thus, I am increasingly seeing my clients fund their $1-3M charitable goals during their last working years using the Donor Advised Fund, with the plan to distribute those assets during retirement.
If you would like to learn whether a Donor Advised Fund would be right for you, feel free to email Alex@fncadvisor.com for a 20 minute consultation on the topic. Contributions to a Donor Advised Fund must be completed by December 31st in order to be claimed as a 2020 deduction.