Written by Jon T. Meyer, CFP® | 31 January 2012

Would you decrease the amount you give to charity if your ability to deduct it is reduced, or even went away? This might be a question you will need to answer later this year. One of the proposals being kicked around Washington, D.C. is a reduction in the deductibility of charitable gifts—allowing those who make more than $250,000 to deduct only 28%. Another proposal would make charitable deductions subject to a 2% floor much like many other current deductions, such as investment advisory fees. And of course, there is always the few who think there should be no tax breaks for charitable gifts. All of these proposals are trying to balance having charities help do things the government cannot afford to do, versus increasing the revenues government wants to balance the budget. At the end of the day, it may, or may not, affect charities.

With this uncertainty, there is a way for you to take care of your favorite charity and get the tax deduction found in current law: consider a donor-advised fund (DAF). A DAF is simply a holding tank created by a public charity to be used for further grant-making. Here is what you need to know:

1. Current tax deduction. When you put the money into the DAF, you get a tax deduction that year. A strategy to consider is to put many years' worth of gifts into the account all in one year. This would allow you a larger tax deduction (that you could use to offset a Roth conversion or other taxable event). If you think you might lose your deductibility going forward this could be a good idea before the end of 2012.
2. More bang for the buck. Instead of putting cash in, put gift appreciated securities (those held for more than one year) in the DAF and avoid paying the capital gains tax. Your tax deduction will be slightly different for securities than for cash; 30% of adjusted gross income (AGI) for securities versus 50% of AGI for cash – note that if you gift more than this, you can carry the charitable deduction over to future tax returns for up to five years. Discuss this point with your accountant before doing anything.
3. Gift whenever you want. Once the money is in the DAF, you can gift it to qualified charities (IRS-approved 501(c)(3) public charities) whenever you want. If you put five years worth of gifting to your church in there, simply dole it out over five years. Some people might not be sure exactly which charity to give it to but as things come up, they have the money available. If you are not sure if the charity you want to give to qualifies, you can ask the DAF to look into it on your behalf.
4. Grow the money. You can also invest the money for longer term growth, and thus more giving down the road. Most DAFs offer many investment choices, usually in mutual funds, that have low fees.
5. Teach your children/grandchildren. Some families will go the next step and have their children/grandchildren be a part of the giving. Segregating a small part of a DAF, even $500, and letting them decide the ultimate beneficiary can add to their growth as they learn that giving to those outside of the world they know can be both rewarding and exciting. Most DAFs allow for you to even name your children as successors after you pass away so the family values can continue on.

There are many organizations offering DAFs, from community foundations to churches. One of the largest happens to be Schwab. In Schwab's case, the account minimum is $5,000 with minimum additions after that of $500 and minimum grants to charities of $50. We can even link Schwab's DAF to your normal statements so you can always see what is going on.

All in all, DAFs are great ways to gift money in a tax advantaged way. The one caveat I have learned over the years though is that once the money is in the DAF, it is an irrevocable gift. When you want to gift it to a charity, the gift comes from the DAF on your behalf. Some people do not like this because they want the credit directly. Some DAFs have now added the ability to send a second letter on your letterhead showing the gift came from you. Of course the opposite of this is true too. Using a DAF to gift to a charity anonymously can be very effective.

Congress may or may not change the tax-deductibility of charitable giving this year; but if they do, I do not think those that are charitably inclined will stop giving. Yet having another arrow in the quiver should something happen could really come in handy. DAFs might just be a silver arrow at that.

About Jon T. Meyer, CFP®

Jon T. Meyer, CFP® is the President of Boeckermann, Grafstrom & Mayer Wealth Management, LLC, a Minneapolis-based Registered Investment Advisory firm. Jon specializes in working with retirees and individuals nearing retirement to help them create the income they need in retirement by utilizing advanced social security planning, tax planning and investment strategies. For more information visit www.bgmwealth.com.