In the wake of the 2018 tax law changes that, among other things, increased the standard deduction to a baseline of $12,000 for an individual and $24,000 for a married couple filing jointly, much attention has been given to the effects such changes might have on conventional charitable giving (as opposed to, for instance, planned giving like gift annuities). In fact, we had a blog post around the time the law passed that predicted some changes in the patterns of charitable giving, including an expected decrease in annual giving. Just this month, news reports have indicated that the impact on giving was even greater than economists expected.
Among the charitable giving and tax planning tips that received significant circulation last year was the concept of gift “bunching,” where a donor would bunch up several years’ worth of annual gifts into one taxable year, to create a larger one-time deduction (as compared to normal pattern of year over year deductions for the same total gift amount), and otherwise relying on the increased standard deduction. The idea behind this was, if you are planning to make the charitable gifts (and we are assuming the gifts would be made even absent a tax benefit), you might as well structure it in a fashion to maximize the tax efficiency.
When the idea was new and being circulated regularly in estate and wealth planning circles, we did not hear many charities complaining. Donations made now are better than donations made later, of course. We did hear rumblings of concern that the bunching approach would lead to more fundraising variability – a greater amplitude in the hills and valleys – which would, in turn, create other budgetary pressures that might offset the advantage of any windfalls from bunching. But, institutions that offer donor-advised funds (DAFs), such as community foundations, were quick to jump in and inform everyone that they could, in fact, despite the adage, have their cake and eat it, too.
Combining bunched giving with a DAF allows donors to maximize their tax efficiency by concentrating the gift deduction into one taxable year (by making a bunched gift into a DAF) while allowing them to preserve the patterns of annual giving with which they (and the donees) had grown accustomed. Utilizing DAFs in this fashion allows the donor to retain all the flexibility of annual giving among their favorite charitable organizations while smoothing the hills and valleys for the charities, and no income tax deduction downside. This strategy may also, for some donors, increase disposable income during the intervening years between bunched gifts, which may present opportunities to employ additional gifting strategies, such as qualified charitable distributions from an IRA.
Want to learn if you can use a DAF as a philanthropic flexible spending account to support your favorite charities? Call 574.232.3538 for an appointment to discuss your goals.
You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.