For some clients, being charitably inclined is at the top of their list of goals with financial planning. Although donating to a charity is generally not done solely for the tax benefits, as the goal is to help a good cause, there are strategies that can be used to make sure that all tax benefits are being maximized when making charitable donations. We always want to make sure that a client’s financial plan is in line with their family’s values, and many clients see philanthropy as a way of living up to their values.

A donor advised fund, or DAF, is an investment account with the sole purpose of supporting a charitable organization. Donations made to the donor advised fund are tax deductible the year that it is donated to the fund, but the funds can be invested for tax-free growth, and then can be given to any charity of your choice in the future (that is IRS-qualified). Donor advised funds have been becoming more and more popular in recent years because they are one of the easiest funds to set up and are one of the most tax-efficient. Rather than keeping track of gifting each year for tax purposes, donor advised funds are much simpler as you only have to record the donation in the year it goes into the fund.

Taking the tax deduction when donating is one main benefit, but donating appreciated stock allows for the tax deduction, as well as avoiding capital gains taxes as charities do not have to pay capital gains. Here is an example:

•  A client who has an adjusted gross income of $1 million can donate 30% of their AGI in appreciated stock (up to $300,000).
•  If this was done from cash to the DAF, this would be a tax savings of $111,000 (37% federal tax rate).
•   If they have appreciated stock worth $300,000 with a cost basis of $100,000, they would pay $47,600 in federal capital gains taxes if it was sold (assuming 23.8% capital gains rate).
•  Instead, this client could donate the appreciated stock to the DAF (instead of cash). They would save $111,000 from the tax deduction, and then an additional $47,600 from not paying any capital gains taxes.
• If the goal is to donate $30,000 per year to charity, this can be accomplished by sending $30,000 from the DAF to the charity for the next 10 years, and the tax benefits have already been maximized.

Donor advised funds can also be a useful estate planning tool. It can be stated in your will that the donor advised fund is the beneficiary of a retirement plan, life insurance policy, or charitable trust. This is a useful way to support more than one charity (vs having one charity as the beneficiary). The gifts can also help reduce the gross estate and avoid estate taxes. A successor, a charity, or both should be appointed to receive the account upon death. It can go directly to a charity, or the successor person can take control of it and make donations in the future when they choose. All donations and growth in the account are tax-free.

It is important to know who money can and cannot be donated to from the DAF. Money can be donated to any 501c3 organization or any IRS-qualified public charity. You are not able to donate to any private charity or political group. You cannot donate to anything that provides an individual a personal tax benefit, such as funding a family member’s education.

Although similar, there is a difference between a donor advised fund and a private foundation, even though both are charitable giving vehicles. Private foundations are separate legal entities that are established by a family or foundation, whereas a DAF is a charitable investment account. Private foundations are subject to more stringent tax rules and have their own tax filing and record keeping. Overall, donor advised funds are much simpler to set up and maintain.

For clients that are charitably inclined, donor advised funds can be a simple and tax efficient way to accomplish philanthropy goals.

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Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

Stock markets are volatile, and the prices of equity securities fluctuate based on changes in a company’s financial condition and overall market and economic conditions. Although common stocks have historically generated higher average total returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in those returns and, in certain periods, have significantly underperformed relative to fixed-income securities. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. A common stock may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.  For dividend-paying stocks, dividends are not guaranteed and may decrease without notice.

Past performance is no guarantee of future results.  The change in investment value reflects the appreciation or depreciation due to price changes, plus any distributions and income earned during the report period, less any transaction costs, sales charges, or fees. Gain/loss and holding period information may not reflect adjustments required for tax reporting purposes. You should verify such information when calculating reportable gain or loss.

This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.  The tax and estate planning information provided is general in nature.  It is provided for informational purposes only and should not be construed as legal or tax advice.  Always consult an attorney or tax professional regarding your specific legal or tax situation.