Donor-Advised Funds: A Tax Planning Tool for Church and Charity Donations
Ernie Neve, CPA
May 11, 2022
Do you give money to your church?
Do you get a tax benefit from those donations?
How about your donations to other charities?
Recent changes in the tax code have done much to destroy your benefits from church and other tax-deductible 501(c)(3) donations. But there’s a way to donate the way you want, get revenge on the tax code, and realize the tax benefits you deserve.
This get-even tool is the donor-advised fund, an increasingly popular way to donate to your church and other 501(c)(3) organizations. Indeed, donor-advised funds have exploded over the past few years, with over one million donor-advised fund accounts in existence as of 2020.
Example. You donate $100,000 to the fund today. You get the $100,000 deduction now. From the fund, you donate $10,000 a year to your church (probably more as your money in the fund grows tax-free).
National investment firms such as Fidelity, Schwab, and Vanguard have all created donor-advised funds. These “commercial” donor-advised funds hire an affiliated for-profit investment firm to manage the assets in the accounts for a fee that varies based on the account balance.
You can also establish a donor-advised fund account with a community foundation that has a local orientation; a single-issue non-profit, such as a university or an environmental charity like the Sierra Club; or an independent, non-commercial organization such as the American Endowment Foundation, National Philanthropic Trust, or United Charitable.
You can always donate cash, including money in IRAs and 401(k)s, to your donor-advised fund account. But many donor-advised funds also accept non-cash donations, including
- stocks, bonds, and mutual fund shares,
- real estate,
- privately owned company stock,
- LLC and limited partnership interests,
- Bitcoin and other cryptocurrency, and
- life insurance.
Donating stock or mutual fund shares that have appreciated is a great tax strategy. Here’s why:
- If you owned the stock for more than one year, you get a deduction equal to its fair market value at the time of the donation.
- And you don’t pay any capital gains tax on the appreciated value of the stock.
Example. Darius owns $1,000 shares of Evergreen stock that’s publicly traded on NASDAQ. He paid $10,000 for the stock back in 2010, and the shares are worth $100,000 today.
He establishes a donor-advised fund in 2022 and donates the stock.
- He gets a $100,000 charitable deduction for 2022.
- He pays no federal tax on his $90,000 gain.
As you can see, there are many benefits to donor-advised funds for the charitably inclined, and few drawbacks.