The revamped tax code is expected to curb deductions for charitable giving this year. The reason: The standard deduction has almost doubled, to $12,000 for single filers and $24,000 for couples. Surmounting those levels to gain the charitable write-off, which is only available through itemizing, will be tough next tax season. But Rick Kahler, the founder of Kahler Financial Group, in Rapid City, S.D., has a way around that:
Larry Light: What’s a good method to handle charitable donations under the new tax law?
Rick Kahler: With changes to standard and itemized deductions under the new tax law, many CPAs and tax attorneys are recommending a strategy of bunching or bundling deductible spending into alternate years.
One way to bundle charitable deductions efficiently and effortlessly is through a donor-advised fund, or DAF.
Light: How does that work?
Kahler: Suppose you budget $15,000 a year for charitable donations. Around half of this goes to local charities you support regularly. The rest you give in different ways, depending on the needs you become aware of throughout the year.
You could double your denotations to charities you support regularly and give directly to them every other year, but you would lessen your ability to give spontaneously.
Giving through a DAF allows you to keep that spontaneity. A DAF allows you to make a large, tax-deductible gift in one year, but decide in the future—a day, 10 years or 100 years later—when and how to distribute that gift. The money stays with the DAF, which invests it, until you instruct the DAF to disburse the funds to the charity of your choice.
Light: Is this catching on among taxpayers?
Kahler: You bet. With the advent of the new tax law, DAFs have become all the rage in charitable giving. According to an article in Advisor Perspectives by Ken Nopar, the senior philanthropic advisor for the American Endowment Foundation, there are now 300,000 DAF accounts.
This is twice the number eight years ago and nearly four times the number of private foundations. But all DAFs are not equal, so establishing one should be done only after some thorough investigation.
Light: What are some of the different strategies for DAF donors?
Kahler: The article suggests that you explore these with your financial planner or tax preparer. One question to ask: What is the appropriate amount to donate to a DAF account? Donate too much or too little, and you may not realize the maximum benefit from your gift. Be sure to check with your tax preparer.
Light: What should you put DAF money into?
Kahler: With some DAF sponsors, it’s possible for your financial advisor to continue to manage your assets in well-diversified, low-cost investments. Otherwise, you may be forced to choose from a very limited number of funds with higher expenses—funds your advisor would be unlikely to recommend. Management by your advisor, in many cases, can produce greater returns, actually allowing you to donate more.
Light: What should you look out for?
Kahler: Investigate these things before choosing a DAF: The fees they charge, whether they appear to have enough staff and experience to administer the DAF properly, how promptly they send out grants, whether they can accept complex assets like appreciated real estate, and whether you could transfer the fund to another DAF sponsor if you should want to do so.
Also ask about limitations and requirements. Some DAFs may limit how much you can give each year to individual charities. Others require a certain percentage, sometimes 50% or more, to be donated to the DAF sponsor itself. A DAF's rules may require the entire balance to be distributed to the DAF sponsor upon a donor's death.
Light: What about choosing a DAF sponsor?
Kahler: As Advisor Perspectives notes, many CPAs and attorneys are providing wise advice in recommending that clients establish DAF accounts. It would be a good idea to take that advice one step further and consult your financial advisor first. Otherwise you might end up with a DAF sponsor that may not be the best fit for your needs or those of the charities you support.
As good as bundling donations to a DAF can be, don't make a decision to use one based on the tax advantages alone. Just as with any investment, it's important to do your research carefully before you write a check.
