This article appears in Charlotte Business Journal.
You likely want your charitable donations to be as effective as possible when you give. A donor-advised fund (DAF) is a charitable investment account to support the organizations you care about. DAFs are one of the fastest-growing giving vehicles in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.
When you contribute cash, securities, or other assets to a DAF you are generally eligible to take an immediate tax deduction. You can then invest those funds for tax-free growth and recommend grants to IRS-approved tax-exempt 501c3 organizations.
Some benefits of using a donor-advised fund
1. Contribute a wide range of assets
Giving non-cash assets can be more tax-advantageous than giving via cash or credit cards, but it may be difficult for many charities to accept these contributions. Contributing assets other than cash is simple with a DAF. In some cases, it’s possible to transfer stock directly from your brokerage account into your DAF, and then make grants in the future to your charities of choice.
2. Maximize potential tax benefits
When you make a charitable contribution to a DAF you are eligible for an immediate tax deduction, just as you would be by donating directly to another public charity such as your local homeless shelter or food pantry. But some donations could make you eligible for additional benefits. For example, if you donate appreciated assets such as stocks you can avoid capital gains taxes while your investment grows tax-free.
3. Invest your donation for tax-free growth
Once you have funded your donor-advised fund, you may recommend an investment strategy for your account—potentially growing your account and providing you with even more dollars to grant to charity. Many sponsoring organizations also have programs allowing you to nominate your financial advisor to manage the investment of your charitable funds.
4. Simplify recordkeeping and organization
With a donor-advised fund, you only have to keep the receipts from your DAF contributions rather than tracking every gift acknowledgment from every charity you support. When you’re ready to support your favorite charity, you can simply log in to your account and recommend a grant to any IRS-qualified public charity.
5. Support your legacy planning
You can incorporate your donor-advised fund into estate planning by making a bequest in your will to the DAF sponsor or by making the sponsor a beneficiary. You can support multiple charities with one bequest by leaving instructions with the DAF sponsor. These gifts can also help reduce or eliminate the potential estate tax burdens.
How a donor-advised fund works
Let’s look at a hypothetical example of how a DAF can work.
Jim and Janice Jones have historically made annual gifts totaling $50,000 to their church, alma mater, and the local symphony. The Joneses’ portfolio includes liquid investments valued at $2.5 million, including $100,000 worth of stock that Janice purchased several years ago. The Joneses want to sell that stock but don’t like that they will pay almost $19,000 in capital gains tax.
The Joneses’ financial advisor recommends opening a donor-advised fund to fund their charitable giving for the next two years. By transferring the stock to their DAF, they receive an immediate $100,000 income tax deduction, which reduces their tax burden by $30,000. In addition, they can avoid almost $19,000 in capital gains tax.
After gifting it to their DAF, their stock is sold, and the proceeds can be reinvested in one of the investment pooled funds. So rather than writing checks to all their favorite charities, the Joneses can make grants directly from their online account. Their financial advisor also recommends taking cash from their previous checkbook giving and reinvesting that amount into their investment portfolio to replace the value of the stock they gifted.
Summary:
Income Tax Deduction: $100,000
Income Tax Savings: $30,000
Capital Gains Tax Avoided: $18,600
Assumptions:
Marginal federal and state income rate of 30%
Federal and state capital gains rate of 21% plus 3.8% Medicare unearned income tax
Please note: This example is hypothetical and for educational use only. The situations, tax rates or return numbers do not represent any actual clients or investments. There is no assurance that the rates depicted can or will be achieved. Actual results will vary. Please consult with legal and tax counsel about suitability.
Donor-advised funds can provide simplicity, flexibility, and tax efficiency to donors. SignatureFD partners with multiple donor-advised funds throughout the United States, and your advisor can work with you to find an appropriate option to help maximize your giving.
