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What is the best vehicle to use for charitable giving?

We comment quite a bit on charitable giving, as our mission is to inspire the charitably-minded to maximize their giving potential. One of the most common questions we get is regarding which type of account is better: DAF or CRT. We’ll discuss the key differences in this blog, as well as the particular types of situations where each one should be used.

Before we get started, here are some blogs about charitable giving strategies:

Donating to Charity? Six Ways to Do So

Donating Highly Appreciated Stock to Charity

Strategies for reducing tax impact when selling a business

And now onto the blog!

What is a Donor Advised Fund?

A Donor Advised Fund (DAF) is a separate account that is maintained by a 501(c)(3) organization. Once you make a contribution to such a vehicle you receive an immediate tax benefit for federal and/or state income tax purposes.

Once you donate to a DAF, the DAF provider has legal control over it, and is the legal owner.  However, the DAF provider allows the donor to advise on how proceeds are donated to the charities of your choice and, sometimes, how funds in the fund are invested. Here’s some good news – because you are no longer the owner, you will not be subject to capital gains taxes or estate taxes, while the investments (if applicable) grow tax-free.  Here’s some even better news—if the gift to the DAF is structured and timed correctly, you can avoid the capital gains on the transfer of an appreciated asset and get a tax deduction for making the gift.

A minor caveat to DAFs is that you must itemize your deductions for the year instead of simply taking the standard deduction. Be sure to work with a tax professional if you consider opening a DAF account.

Donor advised funds are an important charitable giving strategy for many. This chart shows when to use one.

What is a Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust (CRT) is designed to generate income for the donor (or other beneficiaries), with the understanding that the donated assets will ultimately transfer to the sole ownership of your chosen charity after a predetermined period of time (usually at the end of your life). Like a DAF, you get a tax deduction in the year you transfer the assets. However, in this case, the deduction is significantly smaller (the Net Present Value of the future gift at life expectancy) than the deduction allowed for a gift to a DAF.  Similar to the DAF, you are not subject to capital gains or estate taxes on the contributed assets.

However, unlike a DAF, you can still personally receive income from your investments for a predetermined number of years. That is great thing – it’s not only a way to give to charity, but also a way to receive an annuitized income stream. But, since the asset will be owned by the charity when the time period ends, you are not responsible for the capital gains taxes or estate taxes.

Which one is better – DAF or CRT?

If you are wondering which of the two – DAF or CRT – are better for you, here are some points of comparison.

The differences that would be most relevant to your charitable giving strategies are:

  • A CRT will provide you with an income stream should you so choose to receive it, whereas a DAF does not.
  • You will pay a percentage of the assets as a fee to the DAF provider for managing the assets with no or low initial set up costs.
  • DAFs are better suited for smaller donation amounts; a CRT is usually better for contribution amounts over $2 million because there is considerable legal and accounting expense associated with setting one up.
  • If you are charitably minded, a DAF or a CRT can be used by owners of appreciated assets (stocks, commodities, rights, warrants, privately held businesses and real estate) to reduce or, in some cases, eliminate taxes due when selling a highly appreciated asset.
  • Consulting with a team of professionals—legal, accounting and financial is important get the timing and structure correct for maximum benefit.

If neither of these approaches seem right for you, there are additional methods described in our blog on ways to give to charity.

Need a hand with charitable giving?

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No matter your financial situation, you likely have a number of charitable giving strategies at your disposal. At Rock House Financial, a fee-only financial advisor in Farmington, Utah, we are charitable giving tax mitigation specialists. We work with families, business owners, and individuals who wants to make an impact through giving.  

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Disclaimers

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Sources

White Coat Investor. (2019, February 22). Donor-Advised Funds with Vanguard Charitable.  https://www.whitecoatinvestor.com/our-donor-advised-fund-a-personal-experience-with-vanguard-charitable/