If you want to donate money or assets to charity, you want to do so in a tax-advantaged way that benefits both you and the charity. Donor-advised funds (DAFs) and charitable remainder trusts (CRTs) are excellent vehicles to do just that.
Unfortunately, many people get stuck in the details trying to figure out which arrangement is right for them. When do you choose a donor-advised fund vs. charitable trust?
Learn more about the differences and how to choose the right one here.
Donor-Advised Fund vs. Charitable Trust
If you are thinking about how to best manage your taxable income while helping out a charity of your choosing, you need to know the core tenets of both a donor-advised fund and a charitable trust. They have a few things in common, but there are some major differences as well. We will start by taking a look at donor-advised funds.
A donor-advised fund functions as a charity that receives donations from other people. This fund acts as a container for the money that you want to invest until you decide which charity it will actually be gifted to. If you know that you want to donate funds to charity for tax benefits but are unsure where to send them right away, this is the service you could use.
A charitable remainder trust is a bit more regimented and requires you to identify which charity you would like to help when the trust is drawn up, though you are allowed to change your charity later. You will be able to place money in this type of trust for a given term or until your death. One benefit of the charitable remainder trust is that it may make payments or distributions to a non-charitable beneficiary until the trust is actually turned over to a charity.
What to Know About Charitable Remainder Trusts
A charitable remainder trust is one of the most popular vehicles for maximizing tax deductions and pocketing more of your income. Not only are you able to make contributions to this type of trust to minimize your out-of-pocket tax bill, but it can also serve as an annuity fund for you or your beneficiary for a given term, until your death, or a combination of both.
With this type of trust, you will be able to receive payments of at least 5% but up to 50% of the fair market value each year. Whatever remains in the trust at the end of this time period or upon death is given to the charity that was designated when the trust was initially drawn up, unless you have changed it since then.
To set up this type of arrangement, you will need to transfer your assets to the trust. This can be done in the form of property (cars, fine art, etc.) or cash. It will pay the beneficiary (which may be you) for the given term, but the remainder donated to charity must be a minimum of 10% of the initial value of the funds added to the charitable remainder trust.
You are limited to just 60% of adjusted gross income in cash donations each year.
- Tax deduction on assets placed in the charitable remainder trust upfront
- Routine payments to the donor or beneficiary
- No capital gains taxes on the sale of assets
- Excludes these assets from being considered part of the donor’s estate
- Must choose a charity upon setup (but can change it)
- No personal use of assets donated
What to Know About Donor-Advised Funds
A donor-advised fund is very similar to a charitable remainder trust, but it has some important distinctions that you should be aware of when setting up this type of account. First, this type of account makes it much easier to make substantial donations to a charity anonymously.
It’s also a great option if you want to donate money to charity right away for tax purposes but want to actually gift the money to charity at a much later date. It allows you to set those funds aside for donation without the need to select a charity in the here and now.
That being said, you do not have access to this account if you need it for personal use. It must be donated to charity.
The limits on a donor-advised fund are up to 30% of your adjusted gross income if you will be donating non-cash assets and up to 60% of income for cash donations.
- Upfront tax deductions
- No capital gains
- Reduces the size of the donor estate
- Do not have to select a charity right away
- Anonymity in giving
- No income to the donor or beneficiary from the fund
Which is Better for You?
Many people struggle to pinpoint whether they should go with a charitable remainder trust or a donor-advised fund. Most people will find that they can start with a DAF and see how it goes before jumping into a charitable remainder trust.
A DAF is a great starter vehicle to help you see just how much you intend to give to charity if you will be giving less than seven figures to the charity of your choice. You may be able to find a DAF set up by the charity you wish to donate to or you can establish one with certain investment firms much like any other type of investment account.
However, if you will be giving substantial amounts of money, you will likely find that a charitable remainder trust is the better option. Plus, this type of account allows you or a beneficiary to take an annuity based on the fair market value of the account. There are lots of benefits to pursuing a CRT over a DAF.
Get Expert Help with Estate Planning
If you still find yourself unsure whether you need a donor-advised fund vs charitable trust, leave it up to the experts to help you decide. Magellan can walk you through your donation options and the benefits of these different account types to make the best decision for you. Schedule a consultation with us today to maximize your income and donation to charity!