An Efficient Charitable Giving Strategy for Audit and Consulting Professionals

Charitable giving is an important part of our American culture. According to Giving USA, Americans donated $427.71 billion to U.S. Charities in 2018.1 In recently years, donor-advised funds (DAFs) have gained popularity as a vehicle for giving. In fact, contributions to DAFs as a percentage of total giving increased from 4.4 percent at the end of 2010 to 12.7 percent at the end of 2018.2 Following is an overview of DAFs and why this vehicle is becoming an increasingly popular choice for charitable giving.

What is a Donor-Advised Fund?

A donor-advised fund is a 501(c)(3) charitable fund that receives irrevocable charitable gifts from individuals and couples. The donor who makes a gift to the fund retains control over the timing of its distributions and the organizations to which donations are made.

For example, suppose that in 2020, John and Mary Jones donate $100,000 to a DAF at the Greater Kansas City Community Foundation. The $100,000 can no longer be accessed by Mr. and Mrs. Jones for their personal use. However, the Joneses can dictate the timing of donations (2020, 2021, 2022, etc.) to their charities of choice. The amount of the gift and the underlying assets remaining in the fund can be managed by the Jones’s advisor. There is no deadline for the distribution of funds, and the Joneses are not locked into any specific charity; multiple charities can be chosen, if desired.

Why Use a DAF?

There are several reasons you may consider using a DAF for your charitable giving:

  • Simple to set up – It’s much easier to establish a DAF than a foundation. The process includes setting up a new account, with similar paperwork as other financial accounts.
  • Simple recordkeeping – The entity you use for establishing the DAF will track contributions and distributions and provide simplified tax reporting.
  • Tax benefits – There are several ways to realize the tax benefits of a DAF:
    1. Itemized deductions – If you itemize, you can make large donations during your high-earning years and maximize your charitable deduction benefits during years you fall into higher tax brackets.

    For example, suppose John Smith plans to make charitable gifts in retirement and donates income to the DAF during his active years as an audit professional, realizing a tax benefit when he has a higher income. When John retires, he can continue to donate to his favorite charities from the DAF he pre-funded. There are tax rules surrounding charitable giving, so it’s wise to consult with an advisor as you establish your particular strategy.

    1. Standard deductions – If your total allowable deductions in 2020 are less than $12,400 (individual) or $24,800 (married filing jointly), it may make more sense to take the standard deduction. If you are charitably inclined, consider stacking your donations.

    For example, George and Kelly Johnson contribute $7,500 per year to their favorite charities. When adding up all eligible deductions including charitable contributions, if they find they are under the standard deduction it is more beneficial for them to use the standard deduction for tax filing and stack their charitable giving.

    To do so, in 2020, they make two years’ worth of donations, or $15,000, to a DAF at the Greater Kansas City Community Foundation and plan not to make any donations in 2021. If the $15,000 plus any other eligible deductions puts them above the standard deduction threshold for 2020, and it would now make sense to itemize their returns with the higher donation amount. In 2021, they will use the standard deduction amount. By doing so, over the two years, they have the potential to realize a greater tax benefit, yet their chosen charities receive the same amount in donations.

If you are charitably inclined and would like to learn more about whether establishing a donor-advised fund makes sense for your personal financial situation, we are here to help.

Big 4 Financial Freedom is a specialty practice of Creative Planning. Each of our dedicated teams specializes in working with audit and consulting professionals and includes an attorney, a CPA and a CERTIFIED FINANCIAL PLANNER™ practitioner. Our advisors view charitable giving as an important part of the financial planning process and have experience helping clients realize their giving objectives. For help with your personal gifting strategy, or for any other financial matter, please schedule a call.

Troy serves as a Wealth Manager, working directly with clients to develop and implement comprehensive financial plans to address their goals and most complex financial needs. He practices in the areas of retirement planning, investment management, tax planning, estate planning, risk management, and charitable planning. Troy’s approach focuses on a thorough understanding of your circumstances in order to provide you with a truly customized plan to help achieve your goals.