As we look at the potential increase in the capital gains rate, it is important to understand which tax strategies are available to mitigate your tax burden. A donor-advised fund or a private foundation are both great strategies to eliminate capital gains tax on long-term appreciated assets.
Why donor-advised funds?
Donor-advised funds are increasingly popular because they are easy to set-up and flexible to use. They serve as a kind of charitable savings accounts. The purpose of a donor-advised fund is to support the charitable organizations you care about while being a tax-smart investment solution. You can set up an account and contribute cash, securities, and/or appreciated assets and be eligible for a tax deduction in the current year. The tax deduction for cash contributions is limited to 60% of adjusted gross income (AGI), but can be taken in the year the contribution is made. These contributions are irrevocable and cannot be returned to the donor. They can be set-up into mutual funds or exchange-traded funds to grow the money for a good cause.
Who is in control?
Control of the donor-advised fund, or DAF, resides with the fund’s sponsors and most of them allow the donors to appoint one or two successors. The DAF is not a legal entity and has no required state or federal tax filings. The donor can advise the charity, but may not have power to select distributees, decide the timing, nor amounts of distributions. This advice must be advisory and not binding, and the charity is not required to follow the donor’s advice. It must retain complete discretion regarding the use of the funds. The DAF is not required to meet federal minimum distribution requirements.
What is the benefit of a private foundation?
The other charitable vehicle for tax savings is the private foundation. The foundation can hold a more diverse set of assets, such as cash, publicly traded security, mutual fund shares, publicly traded bonds, art, antiques, real property, and more. The tax deduction for cash contributions is limited to 30% of AGI but can be taken in the year the contribution is made.
This is a nonprofit organization that is typically funded by an individual or family. The fund is managed by its trustees or directors and is a tax-exempt freestanding legal entity with tax filings. With a private foundation, the family/individual has more financial control over the asset and can remain in the family for an unlimited number of generations. Unlike a DAF, the private foundation can grant out all its assets to a DAF, make grants to a for-profit-business, create grant agreements, grant directly to individuals and families, and provide scholarships and fellowships.
As you can see, there are differences and benefits to either charitable vehicle. You can potentially optimize your philanthropic impact by utilizing both of them. It is not an either/or proposition. If you would like to know more about these options, you can reach out to our team at Antares Wealth Management.
Kristin Ward is a Manager with our Business and Tax Advisory Group. She can be reached at firstname.lastname@example.org.