BERLIN – The season of faith, hope, charity — and tax planning — is upon us. While there are as many ways to channel generosity as there are generous hearts, many donors are discovering that donor-advised funds provide one of the most flexible and effective means of giving back to their communities or cherished causes. Because donors to these funds receive immediate tax deductions, regardless of when their assets are actually distributed to the charities of their choice, they also offer donors a smart way to be strategic about their charitable giving.
Donor-advised funds let you take your total financial picture into account when planning charitable giving in a way you can’t by simply writing a check to your favorite charity. Suppose you are accustomed to donating $20,000 a year to various charitable organizations. But this year, you also sold a business or a piece of property, creating a substantial capital gains liability. Using a donor-advised fund, you could donate substantially more to the fund this year to take advantage of the tax deduction—and decide later to which organizations you wish to recommend grants.
“You have the leverage of getting the deduction you need today,” said David Ratcliffe, Director of the Merrill Lynch Center for Philanthropy & Nonprofit Management, “but you can change your mind going forward, as far as which organizations you want to benefit.” The donated assets are immediately removed from your taxable estate, giving you and your heirs peace of mind.
The ability to time a tax deduction isn’t the only benefit of these funds. They also let donors strategically gift appreciated assets. For instance, working with your financial advisor, you may notice that a block of appreciated stock, sold outright, will trigger sizable capital gains. By giving that stock to the donor-advised fund, you could avoid the capital gains tax, and the charity ultimately would get the full value of the donation, since the fund pays no taxes on appreciated assets. And until you recommend a grant recipient, the assets are invested and actively managed—with all growth accruing tax-free.
“One of the real benefits of a donor-advised fund is that you can have your children and grandchildren serve as advisors, so it acts like a family foundation in that respect,” says Collis O. Townsend, National Agent at Community Foundations Services Corp. “It creates a family legacy”—without incurring the costs of setting up a family foundation.
Family foundations require a staff and a board, and typically a substantial minimum; a donor-advised fund through the Merrill Lynch Community Charitable Fund Program, by comparison, can be started with as little as $25,000. At the same time, working with a community foundation gives donors access to a knowledgeable board and professional staff available to meet with them and their heirs to talk about philanthropic goals. “There’s an art form to philanthropy that community foundations have mastered,” says Townsend. “They offer tremendous support.”
If you are ready to move beyond periodic check writing to a more thoughtful approach to giving to the causes you care about, talk with your financial advisor about the strategic advantages of channeling your charitable giving through a donor-advised fund.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)