It’s the week before Christmas. One of your favorite clients, Bill Smith, calls to tell you that he just received an unexpected year-end bonus of $175,000 and he is concerned about this taxable event. He wants your advice on charitable giving options. With only a few days left, the clock is ticking. What advice can you offer?
Here is what you know about Bill‘s situation: He is tax adverse. He actively supports his family’s favorite charities and now he would like to do something significant with this opportunity but the amount of his bonus is too much for any one charity. He would like to get his children and grandchildren involved in creating the family’s legacy. He likes to keep things simple.
What are Bill’s options?
- A Private Foundation (PF) – Not enough time for this year and besides, the tax benefits are not as good as if he were to give to a public charity.
- A Donor Advised Fund (DAF) –Since iGiftFund is a public charity that sponsors DAFs, contributions qualify for the highest and immediate tax benefits available.
Here is a quick and simple summary of the tax benefits and practical timing considerations for Bill to consider in setting up a donor advised fund at iGiftFund by year end.
Tax Benefits of a Donor Advised Fund
- The best available
- The ability to avoid capital gains tax
- DAFs are not subject to estate taxes
- Investments can grow tax free
- Contributions may reduce Bill’s AMT liability
The annual deduction amount for this year depends on the type of asset Bill decides to contribute and his personal income situation.
Summary of Bill’s Choice of Assets to Contribute:
Based on Bill’s AGI of $550,000 and not considering other qualified deductions that may come into play, Bill has two choices regarding the type of assets he can contribute this year:
- Cash contribution – Bill can claim the full amount of his $175,000 contribution to the DAF (maximum 60% of his $550,000 AGI = $330,000).
- Marketable securities – Bill’s deduction for this year is limited to $165,000 (maximum of 30% of his $550,000 AGI = $165,000) leaving the $10,000 of unused deductions available for future years.
You advise Bill to review and confirm these options his with his tax advisor as part of his year-end tax planning for this year.
When Is a Contribution to iGiftFund “Completed?”
Generally, the IRS considers a contribution completed when the donor cedes control over the assets to the public charity. Here are some practical guidelines for completed contributions in 2019:
- Checks – Mail must be postmarked by the US Post Office by December 31st.
- Wire Transfers – Wires generally take 2 to 3 business days. Funds must be received by December 31st.
- Electronic Funds Transfer (EFT) – Funds must be received by December 30th.
- Illiquid/Complex Assets (Closely held securities, real estate life insurance, etc.) – Call for instructions.
- Mutual Funds – Assets must be received by December 28th.
Bill’s story is a classic example of why donor advised funds are changing the face of philanthropy and why FAs are recommending this simple, tax-smart and meaningful tool as a part of their clients over-all financial planning. In addition, you can now can actively promote family legacy philanthropy and continue to manage your clients’ charitable assets over multiple generations.