Donor-Advised Funds for Appreciated Stock
For US persons who have appreciated stock and are charitably inclined, one tool that can optimize taxes, give to charity, and diversify is the Donor-Advised Fund (DAF).
What is a Donor-Advised Fund?
A DAF is an investment account that is for charitable purposes. Contributions to a DAF are irrevocable (i.e., once the donation occurs, it is considered a completed gift and funds cannot be used for personal reasons). In this respect, you are eligible for a tax deduction in the donation year.
What Can You Donate?
Various assets can be contributed, including cash, public company stock, mutual funds, bonds, private equity, real estate, business interests, and cryptocurrency, among others.
What Are the Tax Advantages?
More Goes to Charity—If you sell appreciated stock, you will likely owe capital gains tax upon sale. Every dollar you pay in tax is a dollar less that will go to charitable causes. A DAF avoids this tax allowing all funds to go toward the causes.
Example: Genevieve earns $750k USD/yr. She has $250k of Apple stock with a $50k basis and wants to contribute it to charity. If she sells the stock, she will owe 23.8% tax on growth (~$48k). By selling the stock and donating net proceeds, ~$202k would go to charity, ~$48k to tax, and she would get a ~$202k tax deduction. However, if she donates the stock to a DAF, $250k would go to charity, $0 to tax, and she would get a $250k tax deduction.
Pay Less Income Tax—For cash donations, you can deduct the contribution up to 60% of Adjusted Gross Income (AGI). For stock that has been held more than one year, the deduction limit is 30% of AGI. If the contribution is more than the allowed deduction, excess carries over for five years.
Example (Continued): Assuming Genevieve’s AGI is $750k, she would be limited to deducting $225k this year. With the deduction, her federal income tax decreases from ~$235k to ~$155k, saving her ~$80k! The excess $25k carries forward and can decrease future income tax liability.
How Does It Work?
Once stock is donated, it can be sold without incurring tax. Grants to charitable organizations can be spread over several years, rather than all occurring in the year of contribution.
Making a large DAF donation during high income years can decrease taxable income substantially. For those in peak earning years, this can be more impactful than later when income and tax rate are lower.
Grants from a DAF must go to qualified 501(c)(3) organizations (e.g., charitable, educational, scientific, religious, etc.). Most foreign organizations do not qualify. It is worth checking if the organizations you want to support are eligible. Alternatively, grants can be made to US organizations that have a similar mission.
What Happens If You Pass Away?
You can name qualified organizations as beneficiaries to inherit the funds or a successor (e.g., spouse or children) to take over stewardship—investing funds, selecting worthwhile causes, and making grants. The latter can involve the next generation in a legacy of giving.
Since DAF contributions are completed gifts, funds within it are not part of your taxable estate.
Final Thoughts
For those with appreciated stock, a DAF can help decrease taxes, support charitable causes, and diversify.
For more information on how to utilize a DAF to achieve your financial and charitable goals, please reach out to one of our wealth planners.
This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor, or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, the information may become materially outdated or otherwise rendered incorrect due to subsequent new research or other changes, without notice. The author nor the firm are able to always verify the content from third-party sources. For additional information about the firm, please visit the MAS Website at https://www.mas.gov.sg/ and the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm's ADV Part 2 Brochure, please contact us at info@avriowealth.com.