Many donors don’t fully appreciate the potential tax savings that can come from charitable giving. Not only is the timing of the gift important, but how the gift is made (whether in cash or securities) also has an impact on the possible tax benefits.
One of the fastest growing vehicles for charitable giving, the Donor-Advised Fund (DAF), gives donors who itemize their taxes an immediate tax deduction, as well as flexibility in the timing of charitable gifts. Instead of simply writing a check or giving cash to a charity, a DAF allows you to donate cash or securities to your own fund (i.e., the Smith Family Fund), receive a tax deduction in the same year, and then choose when the charity receives the funds. The donation from the DAF to your chosen charitable organization(s) may be made in future years, allowing the assets within the DAF to be invested, potentially compounding until they are ultimately gifted away.
The ability to separate the timing of the tax deduction from the actual gift to charity presents an opportunity to aggregate donations in years when tax deductions may give a higher tax benefit to the donor. For example, if you generally give $10,000 each year to your favorite charities, and you have an unusually high amount of income this year, one strategy would be to pre-fund several years’ worth of giving in the current year, let’s say three years’ worth ($30,000). In this scenario, you would be eligible to receive the upfront $30,000 deduction in a year where the tax deduction may be most valuable to you. The DAF money can then be distributed over the next three (or more) years, potentially growing to a larger amount over time. The advantages to you as the donor are magnified, while the charities of your choice may receive larger annual gifts if the assets in the DAF appreciate during the three-year period.
Another valuable benefit of the DAF is the ease of donating appreciated stocks held for more than one year. By donating eligible appreciated stocks directly to a DAF, you may be able to receive a tax deduction for the fair market value of the asset and avoid paying capital gains taxes. The avoidance of capital gains taxes through giving securities instead of cash can be very valuable. For example, if you own a stock worth $10,000 that you paid $1,000 for several years ago, you can gift that stock to the DAF, receive an upfront tax deduction of $10,000 and never pay tax on the $9,000 capital gain. The stock can then be gifted directly to the charity from the DAF (if the charity is able to receive stock donations) or liquidated and the donation sent as cash. In this way, a DAF can serve as a useful conduit for stock donations to smaller charities that may not be equipped to directly handle gifts of securities.
Donor-Advised Funds may be a beneficial and flexible gifting vehicle to help you accomplish your philanthropic goals. Contact your financial professional to discuss the best strategies for your specific situation.