Using a Donor Advised Fund for Retirement Income Tax Planning and Legacy Goals

Making the most of your resources

 

Should you make a super-gift in retirement?

With an immediate tax deduction and tax-free growth, a Donor-Advised Fund (DAF) may make sense for your retirement and legacy goals.

Do you want to give money to charity?

While there is generally a tax benefit for doing so, we suggest you should also have a desire (and means!) to give. Having a fully formed retirement plan can help you answer the latter, while only you can answer the former.

What’s the best way to give?

Numerous ways to support a charity exist. You can directly give cash, marketable securities, and other property, usually directly to the receiving charity. In fact, if you are making a modest one-time gift it may be best to donate directly to the charity since the tax deduction is the same.

On the other hand, a DAF operates like a mini-foundation. It separates the gift and tax-deduction from the organizations which ultimately receive the donation, meaning you can consolidate many years’ worth of contributions to one or more institutions into a single Super Gift!

How Much Can You Give?

If you donate cash, via check, wire transfer or credit card, you’re generally eligible for an income tax deduction up to 50% of your adjusted gross income (AGI).

However, if you have long-term appreciated assets, such as stocks, bonds or real estate, you have an opportunity to further maximize your deduction. By donating these types of assets directly to charity, you generally won’t have to pay capital gains and you can take an income tax deduction in the amount of the full fair-market value, up to 30% of your AGI in the year of the gift, with a 5-year carryover of any unused deduction.

What Can You Give?

Cash is king, so don’t give it away! Where possible, consider appreciated securities from taxable accounts.

Stocks, bonds, ETF’s and mutual funds are possibly the best funding source for your DAF. You avoid capital gains while simultaneously capturing the tax deduction for the fair market value of the gift.

Real estate, life insurance, and closely-held stock can also be gifted. Each requires an independent appraisal to establish value.

Who can receive grants?

Once you’ve donated to the DAF, you must then advise on the timing and amount of grants. Generally, any IRS-qualified public charity, aka 501-C organization, is eligible to receive grants. Most things you think of as a charity will likely qualify and be eligible to receive grants.

When should you use a DAF?

Some scenarios where a DAF may make sense are:

1. A small business owner with a liquidity event, or anyone with an unusually large income.
2. Retirees with unusually low income, when paired with a Roth IRA conversion.
3. Retirees or anyone no longer itemizing may benefit from bunching charitable contributions into a single year so they can itemize.

 

Other Benefits of a DAF:

Gifts can be made anonymously.
The DAF can be used to teach charitable giving to children.
It can serve as a family legacy vehicle for generations to come.

Summary:

Of the numerous giving strategies that exist, the Donor-Advised fund allows you to retain the most control*, gain an immediate tax deduction, and support your favorite charity both now and into the future.

* Technically, once the gift is made you lose the legal right to it, but a symbiotic relationship does exist. As long as you operate within the legal restrictions of the DAF–notably recommending grants to qualified organizations–you’ll be happy with the other objectives you accomplish by giving up technical control.

If you’d like an objective second opinion about your finances, reach out to Eric McClain and John Lovejoy at McClain Lovejoy Financial Planning.  Located in Vestavia Alabama, We are Fee-Only Certified Financial Planners™  For personalized guidance around your investment and retirement goals, email: eric@mcclainlovejoy.com

 

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