Tis the Season: How to Give Like the Big Boys Do

By Dr. J. David Ashby, CPA, CFP® professional


You’ve no doubt heard of family foundations before, such as the Bill and Melinda Gates Foundation or the Walton Family Foundation. You’re probably under the impression that family foundations are reserved for wealthy families. Private foundations across the world contribute greatly to various needs. For example, Bentonville, Arkansas, has some of the best biking trails in America, thanks to Walton money.

Well, what about you? What if you want to do some good but you don’t have billions, or even millions? Should you form a family foundation? Even if you don’t have money like the Waltons, would a private foundation make sense for your family? Maybe, but consider the following issues. For starters, you’ll probably have to get lawyers involved to set up a foundation. You will need to incorporate in the state you operate from. This involves paying some filing fees. You will need a board of directors, which, of course, could be other family members. A family foundation will have annual reporting requirements to the IRS, reports probably best handled by a CPA. You wouldn’t want to go to all that expense for small amounts of money. Some experts in this area recommend families be willing to commit several hundred thousand dollars or more to form their own foundation.

While that amount of money leaves most of us out, there is a good alternative to the private family foundation. It’s called a donor advised fund, or DAF. A DAF allows you to contribute funds to your own private charitable fund. Your DAF can be started with a relatively small contribution. For example, Fidelity and Schwab will now open DAF accounts with no minimum amounts.

Why might you want to set up a DAF? Suppose you want to commit a sum of money to charity, say $10,000, but you will want to give it over a period of time and to multiple charities. On the other hand, you would like to get an income tax deduction today. So you make an irrevocable contribution to a DAF and get an immediate tax deduction for the full value of assets contributed. Then, in future years, you decide who you want to give to, how much to give to them, and when to give it.

While there are minimum distribution requirements on private foundations, there are no such requirements on the DAF. A private foundation must distribute at least five percent of the fund each year. But your DAF is not required to make any distributions each year. Plus, you won’t have to do the annual filings with the IRS. Another advantage to the DAF!

You can start your DAF with a contribution of either cash, or securities, or both. If you have securities that have appreciated in value, this is an excellent way to provide the donation. For example, you bought $1,000 worth of Apple several years back. Today it’s worth $10,000. If you contribute the Apple stock directly into the DAF, you get the full tax deduction of $10,000 without ever having to recognize (and pay tax on) the $9,000 gain in the stock. This is more tax efficient than simply donating $10,000 in cash. These are certain charitable gifting limits so it’s a good idea to visit with your accountant prior to making the gift.

A DAF is a good option for folks that have a sudden windfall that increases their taxable income. Suppose you realized a $25,000 profit on the sale of some property. You are worried about being in a higher tax bracket. You could set up a DAF and contribute to offset some or all of that windfall.

The Tax Cut and Jobs Act of 2017 doubled the standard deduction, which forced many taxpayers to take the standard deduction instead of itemizing. This often negates the tax benefits of a charitable contribution. A DAF can help here by bunching deductions in a single year and then doling them out to charities later. Suppose you make a sizable donation to your DAF, maybe three- or four-years’ worth of charitable gifting. In that year you itemize deductions and get the tax benefits. In the subsequent years, you take the standard deduction while continuing your contributions from the DAF each year.

You may never have the big bucks like the Gates or the Waltons. But you can access pretty much the same charitable tax benefits the big boys get through the use of a DAF. And in the process of saving taxes, you’ll be helping the charities you want to help.

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