Quick Take: Wendy Hartman on Incorporating Donor Advised Funds Into Your Charitable Giving Strategy

Q: I want to establish a charitable giving fund as part of my overall family financial plan. What are some of the benefits of using a donor advised fund?

A: Donor advised funds can be used to create a family legacy for charitable giving and philanthropy decision making. They are generally cost effective as well as simple to set up and administer.

Contributions to a donor advised fund are irrevocable and tax deductible for the tax year in which the contribution to the fund is made. Contributions should be funded using highly appreciated (low-cost-basis assets) held longer than one year. Donors thus avoid paying capital gains taxes on these assets in the future while obtaining a current tax deduction equal to the current fair market value of the assets. This is one reason using a donor advised fund is a better strategy than simply giving cash.

Since the entire amount of the contribution is deductible in a single tax year, it can be a valuable planning tool in a year with higher than normal income or a large realized long-term gain. Donors have the flexibility to distribute grants in one calendar year or over a period of subsequent years. Grants must be to a named charity that qualifies as a 501(c)(3) organization.

One limitation associated with grants from donor advised funds is that they cannot be used to satisfy previously committed charitable pledges. Most organizations that administer donor advised funds will no longer allow grants to qualified charities that are in payment of tickets to an event if part of the grant is for non-deductible purposes like the value of a meal received at the charitable function.

Donor advised funds are generally created and administered by local community foundations that can also provide guidance on potential grants that meet the donor’s intent. They are also created and administered by major brokerage houses such as Charles Schwab. These organizations provide all necessary documentation, including letters to the recipients when grants are awarded by the donor.

Donor advised funds can be used to achieve a variety of advanced planning goals. For example, successors can be named to the account and/or recommend recurring gifts be made post mortem. It is also possible to name a donor advised fund as the beneficiary of a retirement plan, life insurance policy, will or revocable living trust.

This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Those interested in using a donor advised fund should seek assistance by consulting a tax professional.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2014, The BAM ALLIANCE

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Wendy Hartman, CFP®

As president of Buckingham Strategic Wealth, Wendy Hartman is responsible for providing strategic leadership to the firm by working with the board of directors and our advisory department leaders to oversee and implement goals and team plans to achieve our firm’s strategic priorities. She joined Buckingham in 2010, and prior to that was a strategic advisor with Enterprise Trust Company. She served as a portfolio analyst with First Banks, Inc. and an equity analyst with Bank of America Capital Management. She holds an MBA from Saint Louis University and a bachelor’s degree from Truman State University in Kirksville, Mo.

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