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3 Strategic Tax Benefits of a Donor-Advised Fund

3 Strategic Tax Benefits of a Donor-Advised Fund

May 14, 2024

Many people dream of making a positive impact on their community or the world around them, but the path to achieving that can be easier said than done.

There are so many meaningful causes and charities to choose from, and you no doubt want to make sure your generous donation gets put to good use. That makes taking time to not only choose a cause, but also vet your options for ones that will be efficient and responsible with your contribution.

If you know you want to include charitable giving in your estate planning but aren’t yet sure where to allocate those funds, a donor-advised fund (DAF) could be the ideal solution. This versatile fund allows you to benefit from several unique perks that maximize your donation without choosing a specific charity upfront. 

What donor-advised fund tax benefits can you take advantage of? These strategies will help you think strategically about how to maximize your giving with a DAF. 

1. Immediate Tax Deduction

Decide what you would like to donate in the future, and you can maximize your benefits in the here and now. Whether you choose to donate cash or some other type of physical asset to your donor-advised fund, the benefit is that you can lower your tax liability with an immediate tax deduction. 

The asset you donate to the DAF dictates what sort of tax deduction you can take. 

For example, donating cash grants you an income tax deduction of up to 60 percent of your adjusted gross income this year. If you donate another type of asset, you could get an income tax deduction for its fair market value (up to 30 percent of your adjusted gross income). 

2. Potential 5-Year Tax Deduction

If you’re making a sizable contribution to your donor-advised fund, there’s a chance it may exceed your annual limit for charitable contribution deductions – meaning you won’t be able to claim the full deduction in a single year.

If that’s the case, don’t worry. Giving a generous gift to a charity (or charities) of your choosing comes with long-term benefits. 

Whether you donate cash or assets, any donations exceeding your tax deduction for the year can be carried over for as many as five tax years. This ensures that you maximize the benefit of contributing to a DAF and encourages you to give as much as you would like. 

There are minimal risks of not seeing the benefit when you can carry them for up to five years. Make sure to speak with your tax professional to reap these donor-advised fund tax benefits and maximize potential deductions.

3. Tax-Free Asset Growth

With a donor-advised fund, you don’t need to select a charity (or charities) right away. You can decide at a later date exactly which charities or non-profits will receive your gift based on their reputation or history. It gives you the time to make an educated decision. 

While a charitable remainder trust may require you to immediately name a charitable beneficiary that will receive your donation in the future, a DAF is a clever way around this. Simply name a donor-advised fund as your charitable beneficiary, and you can enjoy the benefits of a charitable remainder trust alongside the benefits of a donor-advised fund.

The best part is that your assets grow tax-free while you figure out where to pledge your support. When the time to give rolls around, the charity will get a larger contribution since the assets have had time to fully appreciate.

Donating those long-term appreciated assets to a donor-advised fund eliminates the need to pay the pesky capital gains tax, which can seriously eat into the generous donation you wanted to make. This applies to assets held for more than one year.

If you decide to make a donor-advised fund your CRT beneficiary, you can also sell real estate within your charitable remainder trust. This eliminates the capital gains tax on the sale of the property and leaves you with more to give to charity and your beneficiaries. 

It’s a win-win solution all the way around: for you, your beneficiaries, and the charity you select to receive your donation at the end of the CRT. 

Protect Your Legacy with Magellan

Are you ready to create a financial legacy for a charity you hold near and dear to your heart? A charitable remainder trust is a key strategy for maximizing your giving and supplying a loved one with a steady income stream for the years ahead. If you want to discuss the charitable remainder trust and donor-advised fund tax benefits, Magellan is here for you. 

Magellan is your one-stop shop for comprehensive estate, financial, legal, and tax planning. If you want to contribute to a cause you care about while maximizing tax benefits, we help with every step of the process, from trust creation to ongoing financial management. 

Contact us today to learn how we can protect your wealth and legacy! 

 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. 

This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.