Discussing Giving Strategies and Tax Advantages of Donor Advised Funds
Giving through a Donor Advised Fund (DAF) is often referred to as an efficient way to conduct one’s philanthropy, but what exactly does that mean and how can a donor begin this conversation with their financial advisor?
Below are a few key strategies to consider during the philanthropic planning process, and how to leverage a DAF to realize tax advantages, maximize giving, and start the conversation between advisor and donor.
Grow Charitable Dollars Tax-Free
One aspect unique to a donor advised fund is that funds can be invested before they are granted out, enabling the opportunity for funds to benefit from potential market growth—tax-free. As the DAF grows, the donor will have a greater amount available to them to donate to charity and the donor receives an immediate tax receipt which can be used to offset income tax.
This is a good strategy for donors who are interested in growing their charitable dollars, even if they have not yet determined where they want to give.
Reduce the Tax Burden in a Windfall Year
In a time of sudden or unexpected income such as an inheritance, selling a business or substantial market returns, the tax burden on an individual can be hefty. In these cases, a donor advised fund can be a great way to reduce the tax burden and fortify philanthropic reserves for the future, particularly when cashflow may be more restricted.
The current economic climate, as a result of the global disturbances caused by COVID-19, is a great example. The prolonged closure of many businesses has put additional pressure on the economy, while at the same time the need for aid to charitable organizations has spiked. Donors who had the foresight to contribute to their DAF during previous windfall years now find themselves in the advantageous position of being able to maintain a consistent level of giving when their preferred charities need it most.
The immediate charitable tax receipt that results from contributions to a DAF can offset the donor’s tax liability in that year when income is higher. A DAF also enables a donor to recommend grants to their preferred charities over time, this in turn makes it possible to capitalize on single high-income events, reducing the tax burden while maximizing the impact of grant dollars.
Reduce or Eliminate Capital Gains with Appreciated Assets
Appreciated assets come in many forms including publicly traded securities, real estate, antiques, works of art, to name a few, and can be a particularly tax-efficient means of philanthropy.
Donating long-term appreciated securities directly to charity—instead of liquidating the asset and donating the proceeds—can help maximize both a donor’s tax benefit and the overall amount they have to grant to charity.
This giving strategy provides two tax benefits; it makes the donor eligible for an income tax benefit using the full fair-market value of the asset, and can eliminate capital gains tax on long-term appreciated assets, as long as they’ve been held for more than a year. Donors should discuss with their financial advisor the details of when and how these assets can be donated to make the most of the asset’s value and the contribution to their preferred charity.
Eliminate Estate Tax for Your Heirs
Many donors have the future in mind when they plan their philanthropy. One giving strategy involves making a bequest under a will to a donor advised fund program or by making the program’s foundation a beneficiary of a retirement plan, life insurance policy or charitable trust. By leaving instructions with the DAF sponsor, a donor can support multiple charities with one bequest. These gifts can also help reduce or eliminate the burden of estate tax for the donor’s heirs.
Philanthropic planning is as unique as the individual donor and their situation. The experienced team at Gift Funds Canada can work with financial planners and their clients or with donors directly to create a donor advised fund that best serves their giving goals and circumstances. Understanding and discussing the options, including how a DAF can help a donor enjoy tax advantages while maximizing their contributions to their favourite charity can be a winning strategy.