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Financial Planning
Aug 2022

Getting Ahead on Year-End Gifting

By Ken Cranstone, CFP®

We have not even hit Fall yet, and I’ve already seen a few stray Christmas-related items pop up in stores. A subtle reminder that you can blink in August and suddenly it’s December. The end of the year fills up with a flurry of activities, and quite commonly, a big bump in charitable donations.

From a tax perspective, the year closes out on December 31st, but do not be fooled, you should not leave all of your charitable donations until the last possible minute.

Utilizing A Donor Advised Fund

If you are planning to make donations this year, consider getting ahead of the pack by establishing a donor advised fund. A donor advised fund (DAF) is sometimes referred to as a charitable checkbook, and in a way, is like becoming your own charitable foundation. You open and manage an account, you fund it with monies earmarked for charitable purposes, and you dole out grants to organizations that you support.

The real power of a DAF, from a tax perspective, is realized through the separation of timing between when you get the tax benefit and when you give money to the charities of your choosing.

Comparing the Alternative

Case in point: Say that you would like to contribute $15,000 across 15 charities in support of their year-end annual fundraisers. Every year, there are a lot of individual moving pieces that need to work correctly to make sure that not only do the charities receive their benefit, but that you are also able to recognize the corresponding tax deductions in that tax year.

  • What happens if you forget to mail out a check by 12/31?
  • What happens if your contribution gets lost in the mail?
  • What happens if you mail out a contribution before the end of the year, but the charity does not process the check until after the start of the New Year?

Now multiply those questions by 15 organizations and you have a recipe for a mistake.

Gifting with Efficiency

Now let us assume that you plan ahead and establish a DAF in October, and subsequently fund it with $15,000. There is no question from a tax perspective of when you have made a charitable contribution because that is the date you fund the DAF. Even better, the money can sit in that account as long as you want. So now December rolls around, your favorite charities are hosting their year-end give-a-thon’s, and you can write grants (think “checks”) from your DAF without worry of how it affects your taxes. If something is lost in the mail, or processed late, it is only an administrative headache, not a potential tax nightmare.

Another important consideration is that you can be more strategic about your gifting with a DAF. Perhaps this year is going to be a much higher tax year than most, and you would get more value for every dollar of charitable deductions than in a more normal income year. Why not consolidate two giving years into one? Donate $30,000 to the DAF, and enjoy the benefit of a bigger charitable deduction. As mentioned before, the money can be in the account for as long as you want – what matters for taxes is when you donate to the DAF, not when the money is granted out to the charities. Now you’ll have two years’ worth of charitable grants, but benefit more from the timing of the donation. Again, there can be value when you can separate the timing of giving from the timing of the related tax advantages.

As for the individual charities, the money is the same to them whether it comes from your checkbook, brokerage account, or DAF.

So do your future self a favor and consider establishing a DAF today. Consider reaching out to your financial planner or local community foundation, as many offer to help set up these accounts, and can even streamline the giving process for local charities.

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