As the end of the year approaches, many investors are repositioning their portfolios, gifting assets and implementing other measures as part of their year-end tax planning. As you begin this process, don’t overlook the opportunity to claim an income tax deduction for charitable contributions. As the past executive director of a not for profit organization, I know the importance of these gifts to help meet missions and fulfill programs.
Americans are a generous bunch. In 2001 alone, we donated more than $212 billion, according to Giving USA 2002, a research report published by the American Association of Fundraising Counsel. Much of this largess came in response to phone and mail requests from charities. The donations are the kind we typically write off as charitable deductions against our annual income. But now there’s a more efficient, and potentially more powerful, way to contribute to nonprofit organizations: through a “donor-advised fund.” This type of fund provides donors with a strategy for planned giving and grant making flexibility, while offering potential tax and estate planning benefits.
Planned giving programs appeal to philanthropic individuals with substantial amounts of appreciated securities, people expecting a large influx of cash, or those in need of an immediate tax deduction. Studies indicate that most of these prospective planned gift donors want to influence how their donations are allocated, but they prefer to avoid the complexity associated with some types of planned giving, such as establishing a private foundation. Donor-advised funds may be suitable for many of these people, because they are easy and inexpensive to establish, and simple to operate.
A donor-advised fund allows a donor to make an irrevocable and nonrefundable contribution of cash or securities to the fund-without losing control of how the contribution is used. The donor can advise the fund’s administrator as to which organizations receive grants, the amount of the grants and when the grants should be paid. Often, donor-advised funds will make tax-free grants as low as $250, allowing a donor to divide his or her total contribution among multiple recipients.
Donors are often entitled to an immediate income tax deduction for the amount contributed to a donor-advised fund. Deductions for cash donations can be as high as 50% of the donor’s adjusted gross income (AGI). Deductions for contributions of stock can go as high as 30% of AGI-and the donor would pay no capital gains tax on contributions of appreciated securities. Any unused portion of the donation may be carried forward for up to five years. Donor-advised funds also give individuals a way to remove assets from their estate, thereby reducing potential estate tax at death.
There’s another reason to consider donor-advised funds as a vehicle for charitable giving: they give your contribution a chance to increase. Assets in donor-advised funds are managed by professional investment advisors. This gives donors the chance to increase the value of their contributions along with market appreciation, resulting in potentially larger grants to nonprofit organizations. Donors may create a legacy of giving by appointing family members to continue directing grants from the fund after the donor’s passing.
Many people who donate to charity tend to make recurring donations to those organizations whose pursuits are most important to them. Others make contributions less selectively, but no less passionately. Regardless of which group you fall into, it’s worth investigating donor-advised funds as a way to maximize your contributions and bring structure to the giving process.
Pamela Kuehling is a Financial Consultant and Retirement Plan Consultant at Smith Barney. PLEASE NOTE her new e-mail address at pamela.i.kuehling@smithbarney.com, or call Pam at 314-982-0380 or 800-999-9580 ext. 380.
Smith Barney does not provide tax or legal advice. Please consult your tax or legal advice for such guidance.