By New York Times Bestselling Author Michael Levin
You’re a generous person. You take care of the needs of your family, you give annually to your favorite charities, and you love to see those deductions reduce your tax bill.
But as a result of the recent changes to the tax code, you probably are no longer itemizing your deductions. Which means that you aren’t taking specific deductions for charitable giving.
It’s not just you. Charitable organizations across the country are taking a huge hit since the passage of the new tax code, as individual donors don’t get that “bang for the buck” feeling of a tax deduction specifically tied a charitable donation.
Fortunately, there is a simple, tax-smart charitable giving strategy that benefits the charitably-minded individual, even if he or she isn’t a Rockefeller or Bill Gates. It’s called a donor advised fund, and although that sounds like a tax strategy available only to the ultra-wealthy, you can start one with just $5,000.
Phil Tobin, Chairman and President of iGiftFund, is widely considered the “Henry Ford” of the donor advised fund concept. He didn’t invent it, just like Henry did not invent the automobile, but he was asked to establish one of the earliest programs in the country as CFO of the Cleveland Foundation in 1986. He quickly realized that this was something that could transform charitable giving in America. “Thanks to this this ingenious tool, even average Americans can enjoy the special benefits of family philanthropy in a simpler and more cost-effective way, and with even better tax benefits than private foundations, the charitable-giving option favored by the extremely affluent,” says Tobin.
“It’s also a great way,” says Tobin, “to help parents and grandparents teach the younger generation about family values and prepare them to succeed as responsible and caring adults. A way to ensure that the parents or grandparents will be remembered. Simply put, a way to create and pass on the family’s legacy.”
Private foundations are a complex, highly-regulated legal entity that can be time-consuming and costly to set up and operate. Experts say that it doesn’t make sense to have a private foundation with less than $ 5 – 10 million. It can take months to get IRS approval.
In contrast, donor advised funds are a simpler and more cost-effective alternative. Since there is no requirement for annual minimum grant distributions, donors can make grants on their own convenient timetable. Donor advised funds pay no taxes. IRS regulations are not a hassle, and since they offer total confidentiality, donors are not besieged by unsolicited grant requests. A donor can typically establish a donor advised fund in a day or so. Like a private foundation, the donor can appoint successor advisors, so the fund can go on over successive generations. And, importantly, they are really fun for the entire family.
Donor advised funds are now the most popular, fastest-growing form of charitable giving in America, outnumbering private foundations 5 to 1. Tobin has helped more than 5,000 families establish donor advised funds over the past 30 years, ranging from as low as $5,000 to more than $100 million.
“As tax day approaches every year, it’s something all Americans should be thinking about,” Tobin says.
Tobin enumerates a number of benefits to donor advised funds:
First, the income tax benefits are immediate and the highest available, better than a private foundation.
Second, the donor is not subject to capital gains tax on gifted appreciated assets. “That’s a double tax benefit,” Tobin adds.
Third, the donor’s fund is not subject to estate taxes. “For families facing estate taxes, that’s huge,” says Tobin.
The fourth benefit is tax-free growth. Tobin says, “The donor advised fund is like a charitable investment account. Monies are invested, typically by the donor’s financial advisor, and earnings are reinvested back into the fund. Unlike payments from a retirement 401(k) or IRA which are taxable, monies in the donor advised fund accumulate over time totally tax free.”
Fifth, contributions to a donor advised fund may benefit taxpayers who may be subject to the Alternative Minimum Tax (AMT).
“From a tax standpoint, it doesn’t get any better than a donor advised fund,” says Tobin.
What’s the benefit of having a donor advised fund, aside from taxes? “It’s a great way for parents and grandparents to talk about values,” Tobin says. “You can have meaningful conversations with your children and grandchildren. What matters to us? What kind of good would we like to see in the world? How can we work together to support it?”
Tobin cautions that not all donor advised fund sponsors are alike. Some are more flexible than others. For example: What types of assets will the sponsor accept? What are the investment options? Can the donor’s financial advisor manage investments? What charities can be supported? Can successive generations participate? What are the administrative fees?
The donor advised fund marketplace is dominated by large, commercial financial institutions, one having more than a hundred thousand donors. Donors report that service is good. It has to be since the sponsors are so successful. Unfortunately, size can bring changes: donor advised funds are becoming more of a commodity; the donor experience is becoming less personalized and more product-focused; and communications with the sponsoring organization is often handled by call center operators.
In contrast, there are sponsors like iGiftFund that focus on what the donor and the family really want to accomplish with their charitable dollars. Donor advised funds are incredibly simple. Their real value is how they can be tailored to accomplish what the donor uniquely wants to accomplish. This is where the experience of working with the donor and their advisor for more than 30 years makes the difference; something typically not possible in the marketplace. When a donor says “Wow, I didn’t think I could do that!” Tobin smiles.
Tobin likes the “small d” democratic aspect of donor advised funds.
“Everybody associates charitable giving with the super-wealthy,” he says. “In reality, much of American charitable giving is made by working class and middle class individuals who do not have great wealth. They are the engine for so many of America’s charitable and religious institutions.”
“These are often the people who are completely unaware of the existence of donor advised funds, even though they have been around since 1986. You don’t have to be rich to have a donor advised fund, but the tax benefits and the emotional benefits of knowing that you are contributing in a meaningful way to the institutions in society that mean the most to you – it doesn’t get any more rewarding than that.”