Once again, it’s the time of year when clients seek advice about making moves to reduce overall income tax liability. Deferring income and accelerating deductions become part of the playbook for a winning game plan. But for many clients, the ability to defer income is not a possibility, and any available deductions have already been maximized. What can these clients do? The answer: Give some wealth away.
Your clients still have time to make meaningful gifts that may not only benefit their tax bill but also a host of charitable organizations that have suffered due to the challenging economic climate. Yet with only a few weeks left to make a donation that will reduce 2011 income tax liability, you should consider simplicity when implementing a year-end gifting strategy.
Consider a DAF
The simplest way to make a gift would be to give cash or property to the charitable organizations your client may wish to support. That is certainly effective, but some clients may not feel comfortable making a significant gift if they haven’t had enough time to perform adequate due diligence on the specific charities or causes. For such clients, a donor-advised fund (DAF) is worthy of consideration. With a DAF, clients can receive the income tax benefits associated with a direct gift to charity without the pressure of having to know exactly which charities will ultimately benefit from the gift.
In basic terms, a DAF is an account created at a charity to accept donations from a donor (i.e., your client) that may be managed by the donor’s financial advisor (i.e., you) and eventually distributed to other charities sometime in the future. Donations to the DAF are generally tax-deductible in the year in which they are made.
Once the donor has contributed to the DAF, he or she assumes the role of “grant advisor.” In this capacity, he or she can make recommendations to the sponsoring charity as to the timing, amount and recipients of future distributions from the fund. Although the grant advisor’s recommendations are nonbinding, as long as the recommended distribution is to a qualified charity, the sponsoring charity (i.e., the DAF) will generally follow the suggestion.
An Excellent Tax and Giving Tool
For clients who itemize deductions, the DAF is a powerful means for reducing taxes. Contributions to it are deductible to the same extent as direct gifts to a public charity. The deduction is based on several factors, including the fair market value of the donated property, the type of property donated (long-term versus short-term capital gain), and the client’s adjusted gross income (AGI).