HighGround Talks DAFs - Part Two

June 24, 2024 - HighGround’s Joe Hancock and Katie Warren were recent guests on Jason Parker’s The Sound Retirement Planning podcast to discuss donor-advised funds, the increasingly popular charitable giving tool. In this three-part blog series, we share key takeaways from that episode. In this post, we cover:


Avoiding Capital Gains Tax with a DAF

Joe Hancock: Donors are able to just maximize gains tax savings sometimes by giving appreciated assets through a donor-advised fund to organizations that might not otherwise be able to receive those appreciated assets. So, some examples might be gifts of real estate or even oil and gas interests. We've had donors that want to make those types of gifts, but the recipient charity that they want to ultimately benefit may not be equipped to deal with those illiquid or harder-to-receive assets.

By giving those assets into a donor-advised fund, the DAF sponsor - organizations like HighGround that are equipped to deal with illiquid, harder-to-move, harder-to-value assets - can receive those assets and allow that donor to not only make a great gift, but to also forgo recognition of gains tax that they would potentially, down the road, realize if they sold those assets. Because giving appreciated assets is a great gift, the donor-advised fund can be a great vehicle to help donors get that accomplished for many charities where it might be difficult otherwise.


Giving Property to a DAF

Joe Hancock: Let's say there's a donor that has a piece of real property and their reasons for wanting to part with it - fundamentally, they're going to be philanthropic, that they're willing to make a gift of any sort, so that's one box that will be checked.

The asset selection - we've already talked about the fact that appreciated assets are a great asset to give. Because if, for example, say this house is worth $500,000, and I'm weighing the option of giving a $500,000 appreciated asset or giving you cash of $500,000. I may be smarter to go ahead and move that appreciated asset, because if I then later need that $500,000 for healthcare reasons or other expenditures that are unforeseen in my life, if I liquidate that appreciated asset personally, I'll pay gains tax on it. But if I give that appreciated asset to charity, the charity will not pay gains tax on it because they're tax exempt. So, when I'm picking assets, appreciated assets are just a great choice any time that it's doable to give that appreciated asset to charity in lieu of cash. I'll hold my cash; that'll never penalize me in terms of a tax. But if I sell that appreciated asset it could, so that's one reason.

Other reasons for parting with real property are just going to be per the individual. You know, they're ready to stop managing that property, they don't want to manage the upkeep and deal with it, whatever that may be. But when they decide to make a gift of it, what we would do, and what most organizations that receive gifts of real property are going to do, is - we'll just have an inspection process. So our real property manager is going to go and physically take a look at that property. They're going to evaluate it and make sure there are no environmental concerns. They're going to get a sense of the marketability, market factors, how quickly we believe we can liquidate or sell that property. And you alluded to that point, Jason. In almost every scenario we're going to sell a piece of real property and use those proceeds and put those to work for charitable purposes. So, if it's in a DAF context, Katie mentioned, we're going to invest those, grow those assets for future charitable distributions, making the most impact that we can.


Giving Business Interests to a DAF

Joe Hancock: We work with a lot of donors that are entrepreneurial. They've created their own business, and so, as you know, that's going to represent a significant portion of their total accumulated wealth. And as they start thinking about transitioning down the line out of actively running that business, if they're the first generation, in many cases, or looking toward retirement, they're going to want to find a way to transition. And for the people that we're working with, they're also going to want to fulfill certain charitable, philanthropic ends. So, when you've got a closely held business like that, a donor-advised fund can be a great vehicle for contributing those closely-held assets, privately-held business interests, into the donor-advised fund.

We made the comment earlier about real estate, oil and gas, those types of assets that can be dealt with by a sponsoring organization that knows how to receive those types of complex assets, so the DAF can receive those business interests, and then, ultimately, there's a process that will allow the donor-advised fund to redeem or liquidate those business interests back to - maybe it's the business itself can capitalize those business interests back or maybe there are parties out there that are able to receive those that are, you might say, that have right of first refusal or subsequent ownership structures in place. And there are particular ways you want to go through that process. You want to make sure that everything is handled according to certain rules and so forth, so that everything is done without any negative consequences, but I won't go into all those details. But the donor-advised fund is a great tool for fulfilling philanthropy while also transitioning business interests on down the line to other owners, and so the donor is able to accomplish two great things.


Leaving Your IRA to a DAF

Jason Parker: Can you leave your IRA directly to a donor-advised fund?

Joe Hancock: And I think you're talking about end of lifetime?

Jason Parker: End of life. Yeah.

Joe Hancock: Yes, end of lifetime, you absolutely can. You can direct any qualified plan - IRA, 403b, 401k - any of those qualified retirement plan assets can be distributed to a donor-advised fund at the end of lifetime. And I think, Jason, you're alluding to the fact that that, too, is a great asset selection. At the end of lifetime, those qualified retirement plans are taxable to individuals - one of the few assets that are taxable to an individual when they receive it at the end of someone's lifetime. It's "income in respect of a decedent" - is the label there. But an individual recipient, children or otherwise, would pay a tax, an income tax. But if I select that asset, that qualified plan asset, to go to charity or a donor-advised fund, no tax will be paid. So it's the smart way to go. It's the most tax-efficient way of selecting what assets to give to family and to charity. Definitely those qualified plan assets to donor-advised funds or charity, absolutely.

Katie Warren: One of the additional benefits we're seeing for someone to name a donor-advised fund in lieu of naming 4 or 5 charities as beneficiaries is that if they wish to change those beneficiaries at any time, it's easier, often, to make those changes to the succession plan of their DAF, or donor-advised fund, than it is to make the changes with the IRA, or call their attorney and have another meeting. So that's another reason, sometimes, they'll name their DAF as a beneficiary.


Charitable Bundling with a DAF

Joe Hancock: The idea of bunching or bundling deductions or contributions is an approach that individuals can take where - you know, I talked earlier about maybe it might be a windfall event, for example. I might have a significant tax liability in a given year that might motivate me to do more charitable giving in a given year to offset that tax liability. That's one reason that people bunch. So, in other words, they're going to maximize as many deductions as they can in the year where they have a high tax liability, and then they could still spread out that giving of those assets over time through distribution recommendations over time.

But really, aside from those windfall or significant events, other individuals are realizing that they, too, can benefit from bunching. So, say over a couple of years' time horizon, let's say an individual gives at a level where they, maybe, are just below the standard deduction level - and that's indexed for inflation each year, but it's been about $27-29,000 in recent years. And so, you might have a family, say a husband and wife, who file jointly. Maybe their giving is just below - maybe it's in the mid $20,000 giving range between tithing and other - well, let's just say whatever giving they do -

Jason Parker: Mortgage, interest and state and local taxes, and -

Joe Hancock: Thank you, Jason; you’re reading my mind. Whatever level of deductions they have, they may not rise above that standard deduction amount in a given year. But what they can realize is that, you know, if I can front-end load, say, several years of giving, charitable giving, into the current year - well, if I can kind of stack up my giving on top of my mortgage interest and business expenses, whatever other deductions I may have, then, in a given year I can exceed that standard deduction amount and claim a larger itemized deduction amount. And then, in subsequent years, my giving - I will have already kind of handled my giving, say, for another couple of years. I'll claim the standard deduction, which may be around $29,000+ with indexing for inflation. Bottom line is that by doing that front-end loading some of that giving in a given year, I'm going to realize a larger total amount of deductions over, say, a 2 or 3-year window than if I had just given steadily over those years and claimed the lower standard deduction year by year by year, not taking advantage of a larger itemized deduction opportunity in a given year with higher giving.

I think there was a lot of tax talk there, but bottom line is for most anyone, if you run the numbers - do the math, so to speak - if you front-end load that giving over a period of several years, then you can typically maximize this tax savings over a span of time that you would not be able to otherwise.


Charitable Deduction Limits

Joe Hancock: Any contribution that an individual makes to a charitable cause, donor-advised fund or otherwise, of cash or non-appreciated assets can be deducted up to 60% of that individual's adjusted gross income in the year of the gift. And if they have excess or leftover deduction after they hit that 60% cap, then they can carry that forward for an additional 5 years. So they have a total of 6 years to do that.

The rule is similar, but with a different percentage for appreciated asset gifts. So, by that I mean, it could be securities that have grown in value, real property that's grown in value, any appreciated asset that has increased in value over the time the donors owned it. And to be considered a long-term capital gain asset, it needs to have been held by the donor at least one year. For those assets that have appreciated in value, the same rules apply. They can deduct that gift value up to 30%, instead of 60% for cash or non-appreciated assets. Thirty percent of their adjusted gross income for appreciated assets can be deducted in the current year, and they get the same 5-year carry forward.

In our last series installment, we’ll answer frequently asked questions about giving anonymously with a DAF, payout requirements, and when a DAF may not be right for you. To listen to the full podcast episode, click here. If you would like to learn more about donor-advised funds, call us at 214-978-3300.

HighGround Talks DAFs: Part 1
HighGround Talks DAFs: Part 3