SOURCE: American Endowment Foundation

American Endowment Foundation

October 19, 2010 09:47 ET

According to American Endowment Foundation, Donor Advised Funds Can Play Important Role in Year-End Financial Planner and Client Conversations

HUDSON, OH--(Marketwire - October 19, 2010) -  After two years of economic uncertainty, volatility and change, the traditional year-end review and planning conversation between financial advisors and their clients has never been more important. With millions of baby boomers entering their prime years for charitable giving and wealth transfer, American Endowment Foundation, (www.aefonline.org), an IRS-recognized public charity and leading independent sponsor of donor advised funds, says Donor Advised Funds (DAFs) present a number of attractive opportunities to reduce the tax bite, while establishing a flexible charitable legacy, which a client can use to support his or her favorite charities for years to come.

Here are three tax-wise topics for financial advisors' year-end conversations with clients.

Tax Advantaged Roth Conversion
Many individuals have explored the opportunities to convert individual retirement accounts to Roth IRAs, but are reluctant because funds converted from a traditional IRA or qualified plan to a Roth IRA are taxed as ordinary income. One strategy to address this issue is to establish a DAF and fund it with other assets (appreciated assets are even better). By making tax-deductible charitable contributions to a Donor Advised Fund in the same year as the conversion, clients can reduce or even eliminate the increased tax liability resulting from the Roth conversion.

Clients Facing the Dreaded AMT
When the Alternative Minimum Tax was introduced in 1970, it was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time. Now millions of taxpayers, including many of your clients, are subject to the AMT. For those frustrated clients, don't forget that charitable contributions are one of the very few itemized deductions allowed under the AMT.

A Solution for Appreciated Illiquid Assets
Individuals who have built businesses, invested wisely in real estate, or hold positions in appreciated illiquid assets face a dilemma: how to facilitate business transfer or an orderly re-alignment of investments without incurring significant capital gains liabilities. Many of these clients would like to reduce or avoid estate taxes too.

"An estimated 50% of the personal wealth in the U.S. is in illiquid assets such as real estate or closely held stock, and much of it is highly appreciated," noted Phil Tobin, Chairman of American Endowment Foundation. "We are seeing an increased number of financial advisors who are doing charitable financial planning around these assets."

In unlocking these assets through a donor advised fund, the donor enjoys the highest tax benefit available: an immediate income tax deduction, no capital gains tax, DAF assets are not subject to estate taxes, and finally, assets in the DAF grow tax-free. If appreciated illiquid assets were contributed to a private foundation, the donor's tax deduction would be limited to cost basis, as compared to full fair market value if contributed to a Donor Advised Fund.

For financial advisors, helping clients fulfill their philanthropic goals can strengthen client relationships. An independent DAF sponsor like American Endowment Foundation enables financial advisors to remain involved in managing their clients' charitable assets through wealth accumulation, retirement, and wealth transfer on through successive generations. 

Candidates for establishing a DAF include those who:

  • are experiencing an unusually high income year;
  • plan to sell a highly appreciated liquid or illiquid asset in the near future;
  • would like to support several charities through one substantial gift;
  • desire maximum flexibility to select charitable beneficiaries over time;
  • wish to involve children, grandchildren in charitable giving; or,
  • are concerned about the complexity, cost, and lack of privacy of a private foundation.

"Donor advised funds have become the fastest growing vehicle for individual and family philanthropy because of the flexibility and convenience they offer in structuring long-term charitable strategies," noted Tobin. "With assets being freed up from the sale or transfer of family businesses, real estate, and highly appreciated assets, advisors need to give careful consideration to options that minimize tax liability, and help clients achieve their charitable goals."

About AEF
AEF was founded as an IRS-recognized public charity in 1993. To date, AEF has received over $300 million in contributions from over 900 donors, and has distributed more than $100 million in grants on the recommendations of its donors. Charity Navigator, the leading evaluator of charities in the country, lists AEF as the second highest ranking charity in the country among those charities awarded their 4-star rating for eight or more years.

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