If you read this post  from Matt Grodin, CPA, you know that recent changes in the federal tax law have resulted in fewer deductions at tax time for many California taxpayers.

You can, however, secure an increasingly elusive tax break if you bunch your charitable gifts into one tax year.  Through a philanthropic vehicle called a donor-advised fund, the donor receives the tax benefit in the year of the contribution to the donor-advised fund while retaining the ability to donate the proceeds over time and to charities of their choosing. The National Philanthropic Trust describes donor-advised funds as “a charitable savings account.”

About 3 percent of all giving in the U.S. in 2016 was done through 285,000 donor-advised funds, the National Philanthropic Trust reported. In that year alone, donors contributed $23 billion to these funds and distributed $16 billion in grants to various charities.

California is home to more than 38,000 donor-advised funds, administered locally by the Silicon Valley Community foundation and the Jewish community Federation of San Francisco, the Peninsula, Marin and Sonoma Counties and other community foundations. Vanguard, Schwab, Fidelity and other investment companies also operate charitable funds that support donor advised funds.

You can use their administrative and management services when you’re ready to create your own fund. Assets donated to your fund can include cash, stocks and securities, income, real estate—and even bitcoin. The National Philanthropic Trust and Vanguard Charitable each require at least $25,000 to create a donor-advised fund, though other providers have lower minimums. Donations are irrevocable, but donors get a tax deduction in the year they make the donations, so they’re an attractive vehicle for charitable contributions.

Donor-advised funds can be especially appealing if you’re looking to donate highly-appreciated stock. Perhaps you were gifted shares years ago or maybe you were part of a successful start-up company sale or IPO. If you sell your low-cost-basis stock and donate the proceeds to charity, you will first have to pay substantial capital gains. But if you contribute the stock through a donor-advised fund, you don’t have to pay taxes on the gain—and neither does the charity.

Meanwhile, all the assets in the fund grow tax-free. You can tap this money to make charitable contributions on your own schedule. You can contribute to almost any charity provided your recipients are established non-profits and you do not personally benefit from the donation. And you can choose what to name your fund, perhaps selecting a title that reflects your passion and focus, such as The Smith Family Fund for Arts Education or The Betsey Davis Fund for Lifelong Literacy.

To get the most value from a donor-advised fund, make a substantial donation in a single year rather than smaller annual contributions. I’d also suggest that you consider establishing or contributing to a donor-advised fund in a year when you have relatively high income; for example, in a year when you diversify out of a low-cost-basis asset such as a large stock position or your highly-appreciated family home.

This article is not intended to be tax advice. Be sure to speak with your tax or financial advisor before making a large charitable gift. Or contact Matt Grodin, CPA or me for help with your charitable giving strategy.


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