Deciding how to make charitable giving a part of your future estate can be a complex decision since there are many moving pieces to consider. Both charitable trusts and donor-advised funds offer financial benefits when it comes to filing your taxes for the year in which you contribute.
The question is: when it comes to charitable remainder trusts vs donor-advised funds, which one has better tax advantages?
Here is a quick dive into the tax benefits of each and a head-to-head comparison so that you can make an informed decision about which charitable giving strategy best suits your estate and financial portfolio.
What are the Tax Benefits of a Charitable Remainder Trust?
A charitable remainder trust can be an extremely beneficial tool for someone who wants to leave a financial legacy to both charitable and non-charitable beneficiaries. Beneficiaries can pull an annuity from this fund for a set number of years or for their lifetime, depending on the structure of the trust.
However, it also comes with some inherent tax benefits in the here and now as well as into the future for your beneficiaries.
To start, you will not have to pay capital gains taxes on items that are liquidated as part of the trust. If you would have paid hefty taxes on the sale of an asset, it may be better to contribute it to your charitable remainder trust where the full value of the sale can make an impact for loved ones.
It also takes these assets out of your taxable estate. Your beneficiaries will be responsible for any estate taxes that remain after your passing, but this can help offset their burden and protect the money from creditors who may come calling after your death.
In addition, you get a tax deduction on assets you put into the trust at the time of the donation. When you make a cash donation to the CRT, you can take a deduction of up to 60 percent of your adjusted gross income for the contribution.
What are the Tax Benefits of a Donor-Advised Fund?
A donor-advised fund also allows you to take advantage of tax benefits for charitable giving. It is best if you want to donate your assets (cash or otherwise) directly to charity and take the tax deductions here and now. It differs from a CRT in that it does not provide income to any non-charitable beneficiaries in the future.
Like a charitable remainder trust, there are some inherent tax benefits to including a donor-advised fund in your estate planning. Both allow you to make contributions to a charity of your choice, but it’s important to understand how you can benefit in the immediate future.
The first benefit is that a donor-advised fund allows you to claim a tax deduction in the here and now for contributions made to the fund. If you will be contributing cash, you can deduct up to 60 percent of your adjusted gross income. Adding in appreciated assets allows you to claim up to 30 percent of your adjusted gross income.
Similar to a charitable remainder trust, you may be able to avoid capital gains tax on assets that are contributed to the donor-advised fund. However, this ultimately depends on the structure of your fund and the specific contribution you make.
Donor-advised funds also reduce the size of your taxable estate, which can allow you to make a larger bequest to your family. Otherwise, your loved ones will have to pay taxes on the estate which may not have been necessary had a charitable plan been properly implemented.
CRT vs DAF: Which Has Better Tax Advantages?
Between a charitable remainder trust and a donor-advised fund, which one is ultimately going to give you the most benefit long-term?
A charitable remainder trust is designed to give income to beneficiaries for a set period (or for their lifetime). As a result, you can contribute appreciated assets, avoid capital gains taxes, and reduce your taxable estate so that beneficiaries get the maximum benefit of your gift. Plus, you get an immediate deduction on your adjusted gross income.
Donor-advised funds are similar, allowing you to avoid capital gains taxes and make deductions to your adjusted gross income in the year you contribute. You get the tax deduction for the full market value of the donation, but no other benefits come back to your family.
In other words, both a CRT and a DAF allow you to take the upfront tax deduction which benefits you in the here and now. Both allow you to avoid capital gains taxes and reduce your estate size for beneficiaries upon your passing.
The main difference lies in how funds are spent. A CRT allows non-charitable beneficiaries to draw an income while a DAF goes directly to charity.
With some of these points in mind, it should be clear that both have a place in future-proofing your financial legacy. The right vehicle depends on your unique portfolio and financial situation. Consult with professionals (such as a charitable trust attorney) to figure out which is the better option for you, your goals, and your legacy.
You may even find that it’s best to set up both a CRT and a DAF. Naming a donor-advised fund as your CRT’s charitable beneficiary is a clever strategy to add flexibility to your estate plan, since you won’t need to choose a charity or charities right away. This approach gives you time to evaluate your options before committing to the cause you want to support.
Make Your Charitable Vision a Reality with Magellan
If you’re ready to get some answers to the debate of a charitable remainder trust vs a donor-advised fund, allow Magellan’s experts to walk you through the various benefits. We act as your one-stop shop for all things financial, legal, tax, and estate planning with ongoing financial management to ensure you achieve your long-term goals.
Contact us today to learn more about how we can assist you with choosing the right investment strategy.
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.
Such trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and favorable tax treatment at the date of the gift by non-recognition of built-in capital gains. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.