Gifts + Estate Planning

From The Wall Street Journal: Donor-Advised Funds: Questions to Ask Yourself Amid a Turbulent Stock Market

BY Spectrum Wealth Management | Jan 20, 2023
By Cheryl Winokur Munk
December 1, 2022

Even with the market’s tumult this year, donor-advised funds can be a good way for some investors to give to charity.

The funds—which let investors contribute assets such as cash, stocks or bonds for charitable purposes—have been a popular choice for people looking to make donations. The contributions are tax-deductible up to certain limits, and people can recommend where they want their assets to go.

But after a choppy year in the market, many investors may be unsure if donor-advised funds are still a good option—or if they want to give to charity in the first place. The question becomes more pressing in December, a popular month for charitable donations overall. Around 20% of giving occurs then, a higher percentage than any other month, according to 2021 data from the Blackbaud Institute, a philanthropic-research provider. 

It is important to consider your contributions carefully, because once you contribute to a donor-advised fund, the transaction can’t be unwound. Here’s what to know before you make a choice.

Are you itemizing?

One basic question to consider with a donor-advised fund is whether or not you itemize your deductions or take the standard deduction—currently $25,900 for married couples filing jointly and $12,950 for single taxpayers and married individuals filing separately. If you itemize, donor-advised funds can help boost your deductions. Likewise, if you are on the cusp of itemizing, the deductions from a donor-advised fund could push you over the edge.

You can typically claim a deduction of up to 60% of your gross income when donating cash, and up to 30% for long-term noncash assets.

“The advantage of donor-advised funds is the ability to spread donations to charities, while taking advantage of the timing of the deduction,” says David Peters, who heads a financial-advisory and tax-preparation business in Richmond, Va.

There may be better options, though, depending on your age and other circumstances. Older people, for instance, can receive more-favorable tax treatment if they donate directly to a charity rather than through a donor-advised fund, says Colby Bircher, vice president at Fidelity Charitable.

Individuals who are 70½ years old or older can donate up to $100,000 to one or more charities directly from a taxable IRA instead of taking their required minimum distributions, and there is no tax on the withdrawals. On the other hand, if you donate retirement assets from an IRA during your lifetime directly to a donor-advised fund, that is a taxable event, Ms. Bircher says. You would still get a charitable deduction, but it ends up being a wash.

Do you want to simplify your giving?

If investors want to support multiple organizations, a donor-advised fund can help ease the administrative burden, Ms. Bircher says. This might also be a good option if investors have charitable aspirations but don’t have a specific charity in mind at the moment, she says. They can make a donation at once and then choose the recipients later.

This strategy can be particularly attractive if you have portfolio losses. Sell the depreciated securities, incur the loss to offset taxes and donate the cash proceeds to a donor-advised fund at any time, says Fred Kaynor, managing director of marketing, business development and strategic partnerships at Schwab Charitable.

“It gives them the flexibility without feeling pressured to donate the cash proceeds right away. They have the time to research the charities or how and where they want to allocate those funds for the charities they choose to support,” Mr. Kaynor says. 

The strategy is especially advantageous for those who itemize deductions and have portfolio losses. Of course, taxpayers claiming the standard deduction can still contribute to a donor-advised fund for reasons such as ease of giving, simplifying record-keeping and to support their legacy planning, even without the extra tax bonus. 

Donor-advised funds can also be a good idea for charitably minded individuals who don’t know the tax basis for the securities they have owned for more than a year. They will receive a deduction—up to certain limits—equal to the fair market value of the securities without having to muddle through the tax-basis calculations or paying an accountant to figure it out.

Do you have long-term holdings you want to unload?

Even with the market’s volatile performance in 2022, some people may still be sitting on long-term positions that have appreciated significantly over the past decade. If they sell those positions outright, they could be hit with large capital-gains taxes, which could minimize or negate the impact of any realized losses they have incurred. But if they donate the assets to a donor-advised fund, they can avoid capital-gains taxes—and deduct the charitable contributions besides.

“If you looked at every position in your portfolio, it’s unlikely that everything is underwater,” says Don Greene, national donor-advised fund executive at Bank of America.

Do you want to balance out high earnings?

Typically, donating appreciated noncash assets offers more tax benefits because of the capital-gains avoidance issue, but some people also use donor-advised funds as a way to bunch several years of cash contributions into one year to maximize the tax deduction. This can be appealing—especially in a high-income year—as a way to push someone into itemized-deduction territory and offset some of the taxes.

To be sure, the allure of this so-called bunching strategy could diminish after 2025, when current tax rates expire and the standard deduction reverts lower, but for the next few years, it is viable for some people, says M. Tyler Ozanne, president of Ozanne Financial Services in Dallas. 

“We’re in a window where donor-advised funds are still really attractive for a lot of people who want to front-load deductions,” he says.

Do you have assets to donate besides cash and securities?

People tend to give cash and appreciated securities like stocks, but make sure to consider the full array of assets you can donate, Mr. Greene says. These include real estate, digital currency, art or other tangible personal assets and pre-IPO shares, he says. 

These types of assets don’t necessarily have to be donated through a donor-advised fund to get a tax advantage. However, some charities aren’t able to accept certain kinds of assets and a sale in order to donate the proceeds could trigger capital-gains taxes. 

“A lot of time people don’t realize that you can gift these assets to [a donor-advised fund], and there can be favorable tax consequences for doing so,” Ms. Bircher says. “Even better, you are taking something that was seemingly illiquid and using it to fuel your philanthropy. That’s the real beauty. You’re unlocking more money for charity that otherwise wouldn’t have been there,” she says.

This article was originally published in The Wall Street Journal on December 1, 2022, and written by Cheryl Winokur Munk.

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