Donor-advised funds (DAFs) are a great way to increase your charitable giving impact. Traditionally, a donor contributes highly appreciated publicly-traded securities (individual stocks, mutual funds, ETFs), but other non-cash assets on the balance sheet may have even greater unrealized appreciation. Examples include ownership shares in their company, real estate, and other capital gain investments.
Let’s quickly remind you of the benefits of a DAF:
- You avoid paying capital gains taxes on the investments donated.
- You receive a current year income tax deduction for the fair market value of the investment.
- Once in the DAF, proceeds can be reinvested in a diversified portfolio and grow tax-free.
- Ultimately, a DAF allows you to stretch your charitable dollars farther than giving with cash.
Things to consider:
- Once monies go into a DAF, the only way they can come out is to be gifted to a 501(c)3 charitable organization.
- Making a gift is as simple as contacting P&A and letting us know the amount and the charitable organization, and we will take care of the rest.
- Fidelity Charitable is our DAF of choice. They charge 0.60% per year on the assets in your account, up to $500,000, then their fee drops to 0.30% (still a modest fee in our estimation).
- P&A does not charge a fee or benefit in any way from you using a DAF.
Individuals embarking upon the sale of a company or real estate will likely create a large tax liability in that particular calendar year. If an individual is charitably minded, wants to minimize their tax obligation, and increase their gifting power, they should consider a DAF.
Below is an example of a business owner (Michael) who decides to donate 10% of his ownership before the sale of his company (which triggers the capital gains tax). Under this example, Michael would reduce his tax obligation by $664,496 and increase his gifting power by $476,000. Key to this is ensuring the remaining 90% proceeds, less tax, allow the business owner to fulfill all other life financial goals. (That is where a P&A Financial Plan can help.)
If you’re contemplating the sale of a business or other highly appreciated asset, and you’re charitable, let’s continue the conversation about how a DAF might be able to help you reach your goals.
