Financial Planning for November 2014

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Create a Charitable Giving Legacy with a Donor Advised Fund

’Tis the season for giving, and there’s nothing better than giving something that’s worth a lot more than you paid for it. If you’re of a mind to make a donation to a charity this year, here’s a strategy that can help your one time donation create a legacy of giving for years to come.

This holiday season, maximize your annual and/or periodic charitable donations by contributing to a donor advised fund. Today’s fastest-growing charitable giving vehicle, the DAF qualifies as a 501(c)(3) public U.S. charity. This means that all contributions you make to it will qualify for an income tax deduction.

Here’s how it works:

  1. Make an irrevocable donation of cash or securities to a DAF now and receive a tax deduction based on the current value of the contribution.
  2. Select investment options among those available within the DAF, and all future gains will avoid capital gains taxes.
  3. In the future, you may recommend when, how much and to which charitable organizations distributions are made.

Donating to a DAF gives you the flexibility to receive a tax deduction now and decide which charities will benefit later. The assets are placed in a separate account for you but professionally managed as part of a larger fund invested for long-term growth. This gives your gift the opportunity to grow into a larger donation in the future. Moreover, you can contribute to the DAF in future years; each time you do, you may claim a tax deduction for that amount on that year’s tax return. And with a DAF, you can donate this year and then spend the next year or so researching the charity(ies) you would like to benefit.

Some of the advantages of a donor advised fund include:

  • No startup costs
  • An immediate tax deduction
    • 50 percent of adjusted gross income for cash gifts
    • 30 percent of adjusted gross income for long-term marketable securities
    • Tax deduction may be carried forward for up to five years
  • Administrative, investment and record­ keeping services are provided by the fund
  • Your DAF account does not have to make a charitable donation each year; the only requirement is that 5 percent of the fund’s total donations be distributed each year

Another increasingly popular way to make a charitable contribution is to gift securities instead of cash. Not only will this allow you to claim a tax deduction for the current value of the securities, but you can also avoid paying capital gains altogether. Qualified charities are not required to pay capital gains when they liquidate for cash, so it’s a win-win for everyone. In fact, the charity can even to choose keep the securities invested for a potentially larger gift in the future.

The best securities to gift are the ones with the lowest cost basis, as these will save the most in capital gains taxes. If you are loathe to give away your top performers, consider using the cash you would have otherwise used as a charitable gift to purchase more shares of the stock you give away. This way, you reset your cost basis, and any gains you earn in the future will be subject to less capital gains taxes. Better yet, since you gifted instead of sold your original shares, you don’t have to worry about the 60-day wash sale rule. Should the stock decline when you sell it in the future, you can deduct the loss on your tax return.

If you’re thinking of gifting securities that have lost money, you should first sell the shares and then gift the cash. This way you can take advantage of the tax deduction for the capital loss as well as the tax deduction for the charitable gift. When you add up the cost savings for these deductions, it might be close to recouping the money you lost.

It’s not a good idea to gift shares of stocks and/or mutual funds that you’ve owned for less than a year. That’s because you can claim only the cost basis you paid as the tax deduction. By gifting long-term appreciated shares, you not only benefit from a higher tax deduction, but your gift will be worth more than what you originally paid for it.


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