Americans have always been generous to those in need, and there are great charitable organizations throughout our county. The total dollars given to charity each year are significant, and totalled $316 billion in 2012 according to the Center on Philanthropy at Indiana University.
The federal government recognizes the tremendous work and impact that charitable organizations have on the wellbeing of our society and allow donors to take a tax deduction of up to 50 percent of adjusted gross income for cash contributions and up to 30 percent for securities. Many of us simply write a check to those causes we feel deeply about, however, there are other vehicles that can achieve our charitable goals and offer added benefits from a tax saving perspective.
Donor advised funds have been around for more than three decades. Simply put, they are charitable organizations that allow for tax deductible donations to be made, invested and then redirected to qualified organizations. DAFs allow for donations to be deducted for tax purposes in the year of the donation, however, the donation amounts do not have to be "redirected" or granted to the final charitable organization in that tax year. They can be invested, allow to grow over time and then granted to the organization of your choice. There are many DAFs available to the general public and many are administered by large financial institutions. Such funds are very much a turn-key solution for those individuals who have a charitable nature and offer simplicity, low cost and a charitable legacy element.
There are several tax-efficient strategies that can be applied to owners of DAFs. Consider the following hypothetical situation and strategy: Mr. Jones is a successful businessman and makes an annual charitable donation of $10,000. He's also a savvy investor and has a non-qualified account of stocks with significant unrealized long-term gains. One of the stocks in his portfolio is an energy company that has a tremendous gain; it was a gift from his father many years ago and now has a market value of $10,000 and a cost basis of $1,000. Mr. Jones has great personal attachment to that stock, the energy company is still growing its profits and he sees no fundamental reason to sell.
The Tax Efficient Way to Give .
Mr. Jones decides to set up a DAF to make his annual $10,000 charitable gift. However, instead of writing a check from his bank account, he transfers the highly appreciated stock to his DAF. When the transfer is completed, he receives an immediate tax deduction for the $10,000 market value of the stock, then liquidates the stock position incurring no capital gain in the transaction and directs his DAF to make the grant to his charity in his name. Mr. Jones then uses the $10,000 from his checking account that he would have otherwise used to fund the charitable gift to purchase new shares of the energy company in his non-qualified account. He now still owns the same stock that his father gave him years ago, with no imbedded capital gain, received tax deduction for $10,000 and he satisfied his charitable goal.
Charitable giving never felt so good!
Dean J. Catino, CFP®, CPWA®, CPRC®, is a Managing Director and co-founder of Alexandria, VA-based Monument Wealth Management, a full service wealth management firm located in the Washington, DC area. Dean and the rest of the Monument Wealth Management team can be followed on their blog at "Off The Wall", on Twitter @MonumentWealth, and on their Facebook page.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Monument Advisory Group, LLC, a Registered Investment Advisor. Monument Advisory Group, LLC, and Monument Wealth Management are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. When making retirement or tax-deferred investments, early withdrawals, retirement and death may cause penalties or taxes. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The hypothetical example listed above and is not representative of any specific situation. Actual results may vary.