Estate Planning Essentials: December 2018
Chambliss Estate Planning Essentials brings you legal developments and other trends of vital interest in the world of estate planning. This post is brought to you by David Hunter and other members of the Estate Planning Practice Group of Chambliss Law Firm.
Gift Bunching to Donor Advised Fund – Good for Taxpayers and Charities
Although tax incentives are rarely the only reason donors make charitable gifts, there is a large number of people who are inclined to donate, and for whom the tax deduction for charitable contributions is a motivator.
Due to changes under the Tax Cuts and Jobs Act such as the increase in the federal standard deduction to $12,000 per person ($24,000 per married couple) in 2018 from $6,350 per person ($12,700 per married couple) in 2017 and elimination of many itemized deductions previously available, substantially fewer taxpayers will be itemizing their tax deductions. Since the personal charitable contribution deduction is an itemized deduction, it may be advisable for donors to bunch several years of charitable donations in one year to address these tax changes and to help preserve the income tax benefit of charitable giving.
If a goal of the donor is to be able to provide level funding to a desired charity consistent with his or her prior gifting pattern, the donor could set up a donor advised fund (“DAF”) either with a local community charity (e.g., Community Foundation of Greater Chattanooga) or with a financial institution-sponsored fund and give the aggregate amount to the DAF. In so doing, the donor should receive a charitable deduction of the aggregate gift in the year of contribution to the DAF and have the funds contributed to the DAF distributed to the charity or charities of the donor’s choosing in later years consistent with the donor’s prior gifting pattern.
In order to illustrate gift bunching to a DAF, consider the following:
Mr. and Mrs. Smith are married and file a joint tax return. The Smiths typically incur around $23,000 of itemized deductions each year consisting of charitable contributions ($5,000), mortgage interest ($8,000), and property taxes ($10,000).
Since the Smiths are entitled to a $24,000 standard deduction under the new tax law, they receive no tax benefit from the $23,000 in itemized deductions and would claim the $24,000 standard deduction each year.
What if the Smiths elect to bunch their charitable contributions into a $15,000 donation every three (3) years to a DAF?
As illustrated above, although the Smiths made the same aggregate charitable gift of $30,000 ($5,000 per year for Years 1 through 6), by utilizing gift bunching with a DAF, the Smiths will receive $18,000 of additional tax deductions over Years 1 through 6 without disrupting the pattern of giving the charity or charities have come to expect from the Smiths.
Do you still have questions regarding the tax benefits of a DAF? Please contact us so we can discuss your unique situation and how a DAF might help.