by Loren Bailey
Senior Wealth Manager
Carl woke up in a cold sweat. He had just had a horrible nightmare; the kind that makes one reflect over their life, life’s purpose, etc. He looked in the mirror at his 72-year-old face and wondered how it got that way. After all, he has the same outlook and attitude as when he was 35 and, in his mind, that was the way he still looked…up until this point. Throughout his life, he had had always been an over achiever. He successfully created 2 businesses, owned several homes, and has amassed a small fortune. So what is the problem? Although he had been married twice (one divorce, and one spousal death) he had no children. He had no one to whom he could leave his legacy. Despite his achievements and life-long successes, what was it all for? At the core of his new-found misery was aching thought that once he left this earth, he would be forgotten and forever lost to time. After all of accomplishments, he felt a failure.
Then, he remembered a brief conversation he had with his accountant about charitable giving. His accountant mentioned a way to save on taxes by giving charity. The more he thought about it, the more confident he felt about being able to leave a legacy after all; not to someone but to something. The next day, he contacted his financial advisor, told his dilemma and inquired more about giving to a charity to leave a legacy. The advisor said that he had a potential solution for him. “Donating to a charity is a wonderful decision. In your current situation, you should use the Donor Advised option”. You can guess Carl’s next question, so I’ll just explain it.
The Donor Advised Fund
A Charitable Gift during a given year will allow you to donate assets a charity and benefit from a tax deduction. Currently, if you donate cash, you can deduct all of it up to a limit of 60% of your adjusted growth income. If you donate securities or appreciable assets like real estate, you can deduct up to 30%. A gift will allow you to feel good about helping a worthy cause, or assisting in the continuity of a worthwhile organization. It can allow for a lasting legacy. This of course made Carl feel better and was a great answer to his concerns. But he still was unsure about how he should do it. He was still working, but planned to step away from his business within the next year or two. He was also unsure of how to give and which charities to choose. A Donor Advised Fund is a qualified, non-profit account which will allow him to make a large donation and take advantage of a charitable contribution while his income is still high. He can then make distributions to a specific charity or charities at a later date, or well after retirement. Let’s look at the following chart to see how this works.
A donor can contribute cash and appreciated assets to a donor advised account or “fund”. The donor advised account is a non-profit entity, so you get an immediate tax deduction for the year. Also, selling the appreciated assets within the fund is a great way to avoid a capital gain tax. While you are deciding on where to ultimately donate, your assets can be managed with investments to grow over time, increasing your donation(s). There is no limit to the amount you can donate to the fund, to the number of qualified charities to which you can donate, nor is there a limit to the time in which you must deplete the donor account. In fact, as long as you name a successor, the fund can continue to make donations long after your death.
Example: If you donate $100,000 in appreciated assets to a donor advised fund, you get an immediate tax deduction of up to 30% of that year’s adjusted gross income. Since the assets are sold within the donor account, you avoid a capital gain tax, allowing a donation of 100% of the value of the assets. Say you want to distribute $20,000 a year to a charity or charities; if so, you can do this for 5 years. Or, if your assets are invested within the donor account, the ultimate donation may end up being larger than $100,000 and may be distributed longer that 5 years. And, each year, you decide whether a contribution will be made.
How We Can Help
This was a wonderful answer for Carl as it satisfied his concerns of legacy, and timeliness. Having this solution as a workable plan allows for the possibility of his life’s work to be meaningful and remain relevant long after he is gone. Charitable giving and its various options can be complex. While the donor advised choice made sense for Carl, there may be other options available to you. Because we partner with both Charles Schwab Charitable and Fidelity Charitable, we can help determine whether a donor advised fund would be an appropriate option. Contact us! We can help you find the right solution!