Bonus Season: Time to Consider a Donor Advised Fund

Spring is a time for rebirth, renewal—and bonuses!

Bonus season is upon us, which means your clients are thinking about the impact of this year’s incentive compensation on their income taxes and (hopefully) their philanthropy. This may be especially true given that taxpayers are filing returns for the first time under the new system created by the Tax Cuts and Jobs Act.

Now is your opportunity to lead with advice and suggest a donor advised fund (DAF) as a way to help your clients maximize their philanthropy.

The new tax law may change how donors give

The Tax Cuts and Jobs Act was signed into law by Donald Trump at the end of 2017, and the full impact of the law will be felt for taxpayers this spring as they file for the first time under the new system.

There are many changes to the tax law that are likely to impact charitable giving, including the increase of the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. For some taxpayers who previously itemized deductions, the increased standard deduction may make itemization less necessary or appealing, depending on the year.

Some of your donors may want to consider “bundling” or “bunching” charitable gifts in a given year by making a large contribution to a donor advised fund at The Chicago Community Trust. The bundling approach allows a donor to make several years’ worth of donations into a DAF in a year when it is advantageous for the donor to itemize deductions. The DAF can then be used for making charitable gifts over a period of years.

For clients who are anticipating large incentive payments in 2018, whether in the form of cash or securities, a DAF may be a perfect way to pre-fund charitable giving for the next few years.

A single contribution receipt is a beautiful thing

Many of your corporate executives are just as busy in their civic and social lives as they are with their work. This may include serving on a nonprofit board, chairing a civic committee, leading a fundraiser or mentoring through an alma mater or neighborhood organization.

With great civic commitments often come numerous charitable gifts, and tracking down those gift receipts at tax time can be a headache.

A donor advised fund is a great vehicle for simplifying your clients’ charitable giving, especially for clients who tend to make several smaller gifts to charity throughout the year. The donor can make one annual contribution to his or her DAF, and receive one gift receipt for tax purposes. The donor can then recommend grants out of the donor advised fund account to multiple charities throughout the year.

Capitalize on stock awards for charitable giving

The end of 2018 was one of the worst on record for the stock market, with December losses not seen since the Great Depression. However, stocks have rebounded strongly to start 2019, so stock holdings may be an excellent option for funding a donor advised fund account, especially if the stock has a low basis with built-in gains. Of course, when a donor makes a gift of stock, she can deduct the full fair market value of the stock and avoid realizing the capital gain when the receiving charity sells the stock—a double tax win.

What can a potential donor do if she wants to make a charitable gift of stock, but may not want all of the stock sold immediately?

When a donor makes a gift of stock, she can deduct the full fair market value of the stock and avoid realizing the capital gain when the receiving charity sells the stock—a double tax win.

Some donor advised fund providers, including The Chicago Community Trust, permit custom investment allocations on larger accounts. For instance, the Trust allows donors who fund an advised account at one million dollars or more to recommend a customized investment portfolio for their funds.

This may be an ideal solution for corporate executives who prefer to make large charitable gifts using stock, but see the stock as having potential to appreciate over time.

Gifts of stock can be challenging for some charities

Your philanthropic clients may have the desire to make gifts of stock to organizations that simply do not have the mechanisms or capacity to accept gifts of securities. This may be especially true of smaller charities or local religious institutions.

An easy solution to this challenge is a donor advised fund. Your client can fund a DAF at the Trust with appreciated stock, and in turn can recommend grants out to organizations. Those grants are sent as checks, making it very easy for smaller or less-sophisticated organizations to receive support.

During this bonus season, consider your clients who may benefit from leveraging cash or equity awards to fund their philanthropy. The Chicago Community Trust is well positioned to help those clients simplify their giving, maximize the tax incentives of making charitable gifts and make your life as an advisor easier come tax time.

For more information, please contact Tim Bresnahan at 312.616.8000 ext. 158 or by email at tbresnahan@cct.org.