October 2017.


Soon after the trick-or-treaters are done banging on your doors its time for fall wrap up. Remaining lawn chairs, storm windows, et cetera, are dealt with ahead of winter except for places here in the Southwest.  Here in Scottsdale, winter is just a nice break from the heat.  In 2016 we had 30 days of 110° or higher and average 110 days of 100° weather. Crazy, isn’t it?  But, for a majority of the country that lives in the Snowbelt, November means batten down the hatches. The same is true for finance and tax planning. Many people start looking at holiday shopping budgets and year-end projections to see if they are on target.  Tax 911 calls usually start in early December.

I’m going to talk about the most used tax planning concept in the month of November and December, charitable planning.  If you’re a regular contributor to charities, good for you. There are many ways to do this beyond simply writing a check to a charity and saying goodbye money.  Savvy investors often create “Donor Advised Funds” (DAF) with a financial planner.  It’s a simple subset of a 501c charity that allows you to name your fund. In many cases, you can control the investments inside your funds, or at least have some say, and then finally, make recommendations to the 501c about where to send that money.  The fund normally follows your recommendations. The only caveat is that the charity must qualify by IRS rules.

Here is an Example:  The Smiths give $10,000 a year to their church and several local charities that they care about.  Rather than simply writing those checks, Mr. and Mrs. “Smith” decide to use their own personal philanthropy as a learning experience to make sure their children understand the importance of giving. Perhaps planting the seeds so that their children don’t become too entitled.  They also asked their children what charities they would like to give to and why. Then, instead of giving money directly to their church and charities, the parents create the “Smith Donor-Advised Fund”.  They name themselves as the trustees of the funds, and their children are the successor trustees of the fund.

With a DAF, the family gets to name charities that it wants to donate to today. In addition, they state the purpose of their charitable giving as a guideline for the document and build in flexibility for the future. The trustee can add or subtract churches and charities. Therefore, if a charity stops needing funds because it’s endowed by another greater charity or it merges with another charity or for any other reason, they can instantly change recipients of the Fund.

Most likely, even though it’s been happening for years most children are truly unaware of the gravity of the size of the gifts that their families give. Soon they will be talking about the fact that they’ve started a permanent lifelong charitable foundation that will be in effect their entire lives and their children’s lives, and tell their children that someday they’ll be in charge of this charity and they’ll have to make the decisions that you’re making currently today.  The children can then help decide what types of charities to fund.

Here is the best part; the money put into the DAF will provide a tax deduction even though the actual gifting to the charities might not happen in the same calendar year.  A $10,000 deposit in the family Donor-Advised Fund gets treated as a $10,000 deduction on their schedule A in the year it is made.

Contributions can be many different types of assets:

  • Cash
  • Highly appreciated stock
  • Mutual Funds shares
  • Real Estate
  • Shares in privately held businesses

You potentially could contribute highly appreciated stock or real estate at its current value and get a deduction of up to 50% of your AGI in the year of donation while avoiding having to pay tax on the accumulated capital gains.  Imagine donating stock in which you originally invested $50,000 with a current value of $250,000.  You could get up to a $250,000 charitable deduction and avoid capital gain tax on $200,000 in accumulated capital gains.  This could be a significant tax windfall.

Much tax planning these next weeks will be charitable in nature. Talk to us about a Donor-Advised Fund that you can name, guide, and control the assets in, and take your family philanthropy to the next step.

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