Why donor-advised funds are worth a second look

It goes without saying that 2020 has been a year unlike any other, which makes relying on your trusted business and tax adviser for year-end tax planning even more important. We have offered 10 year-end tax strategies that you can take advantage of now, but there is one in particular that we want to discuss in more detail.

We advise taking advantage of charitable contribution options in 2020 while the limit is 100% of AGI. One of our favorite options for charitable contributions is donor advised funds.

A donor-advised fund is like a charitable investment account that is established for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities, or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.

The deduction for contributions to a donor-advised fund is limited to 60% of adjusted gross income. (Note that under CARES Act, contributions to public charities are 100% deductible, but they are not applicable to donor-advised funds or private foundations, which still have their previous limitations.)

A major advantage of giving to a donor-advised fund is that you are donating to an established tax-exempt organization. Thus, there is no need to apply for tax exemption, and no annual IRS filings are required.

It is important to bear in mind that a contribution to a donor-advised fund is irrevocable. In other words, the funds cannot be returned to the donor or any other individual or used for any purpose other than grantmaking to charities. You must get a written acknowledgement from the fund’s sponsoring organization that the organization has exclusive legal control over the assets contributed.

Though the donor can advise the charity, which generally will follow his or her recommendations, the donor does not have power to select how the funds are distributed or determine the timing or amounts of distributions. The donor can offer advisory input about who could be possible recipients of the funds, along with the ideal times and amounts to distribute the funds. The charity, though, is not required to follow the donor’s advice, and must retain complete discretion regarding the use of the funds.

Overall, we believe donor-advised funds are a viable option for charitable giving. In addition to the tax deduction, donations are not subject to estate taxes and the investments can appreciate tax free.

Please contact our office or our partners with Antares Wealth Management if you would like to learn more about donor-advised funds.

Nina Daigle, CPA, is a partner with Antares Group, Inc. She can be reached at ndaigle@antarescpas.com.