DAF (Donor Advised Fund) Funding Options

Charitable planning is an important part of many of the clients we work with, and the use of something called Donor Advised Funds is often a great resource. Briefly, they are accounts one can establish through an institution that allows the donor to contribute for a specific year. The funds go into an account that can be invested as the donor wishes, and the contribution for that year is deductible. However, the funds do not have to be distributed that same year. Instead, they can stay in the account until the donor decides to make a gift, often over many years based on the needs of the family. There are many additional nuances such as setting up beneficiaries for legacy planning, donating other items such as real estate, fine art or business interests, but for this article, we just wanted to focus on two specific items, cash and securities.

Cash

When one contributes cash to a donor-advised fund, the money is simply moved into the account and invested from there. While there is no tax benefit from the investment side, there is a tax deduction of up to 60% of an annual AGI (Adjusted gross income). This is the maximum amount allowed to be deducted each year.

Securities

The most common way we tend to fund donor-advised funds is through the gift of highly appreciated securities. For example, if someone has stock they paid $10,000 for and it is now worth $50,000, they can donate the full amount, avoid the taxes on the $40,000 gain, and get the tax deduction for the year. Appreciated securities are limited to 30% of AGI per year but can be carried forward for 5 years. This double benefit can be very meaningful.

One other item we often discuss with clients as part of an overall tax planning picture is to use active losses to offset gains in outside portfolios and then use the cash from the sale to fund the DAF. This often occurs when there is not outside cash readily available, but in a year where planning could benefit from charitable planning. We don’t receive the benefit from asset appreciation but still get the 60% AGI benefit as well as offsetting outside losses against gains.

Donor Advised Funds as they exist today are easy and useful opportunities for folks with charitable intentions and looking for a very simple way to establish a legacy plan. Please give us a call if you would like to further discuss these plans.

Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten