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Many people believe in giving back, but under the new tax laws, it may not be as tax advantageous as it used to be. With the steady appreciation in the stock market – the longest bull run in history – some folks have achieved a level of wealth they never imagined. Our Charitable Strategies work is focused on smarter, tax-efficient ways to help people give back a bit of that wealth to various philanthropic causes. But we are often surprised to find even large, well-established, donors who are still not familiar with the benefits of donating appreciated stock and how to use Donor Advised Funds (DAFs).

Donating Appreciated Stock

The advantage of giving away an appreciated asset is that you will never have to pay the capital gains tax on that asset. For example: if I bought Amazon stock for 10k and it is now worth 100k, when I sell it, I would have to pay capital gains tax on the $90k of appreciation—which would leave me with $78,500 after tax.* If I donated those shares of stock directly to a charity or DAF, I get the full deduction for a $100k gift and don’t pay any taxes.

Why Use a DAF vs. Donating Stock Directly?

Donors often want to give a specific amount to the charities of their choice. When donating shares of stock, the asset will be liquidated by the charity for whatever value they held upon moment of sale. If stock prices fluctuate, your charitable gift could end up being more or less than what you intended to give. Also, some smaller charities aren’t set up to accept direct stock donations, limiting the list of recipients you’d like to support.

A Donor Advised Fund works as a charitable investment account for the purpose of transferring donations to organizations that you designate. When you gift appreciated stock to a DAF, you are eligible to receive an immediate tax deduction for the full value of the stock in the tax year you donate, and the DAF can invest those funds for tax-free growth and send a check to the charity/charities of your choice for the amount suggested.

You also gain the benefit of not having to distribute the full value of your donation to charities that year. Your stock can remain invested within the DAF and continue to grow for charitable designations in the future. This allows for a larger single deduction for tax purposes, which works well under the new tax laws.

Why Do an Audit?

For charities that are looking to raise more money, a review of major cash donations from large donors and active board members can be a valuable step. Many such donors could benefit from an introduction to the increased value of donating appreciated assets or using a DAF. If more active donors understand the advantages of donating stock and other appreciated assets, they can give more away for the same cost and potentially experience a more efficient tax process.

Caveats and the Bottom Line

DAFs have come under some heightened scrutiny of late, as they are not legally bound to spend the donated money they receive, and donors technically cede legal control of their contributions to the DAF sponsor. DAF fee structures and unexpected sponsor beneficiaries have also been questioned in some cases—so it should go without saying that not all DAFs are created equally, and consulting with your financial advisor before making any decisions is important.

For investors with a focus on philanthropy and for not-for-profits looking to maximize the way they receive funding, DAFs offer a streamlined and tax-friendly means of giving and getting donations. DAFs have almost doubled the amount of money that they have paid out since 2010, and the use of these vehicles to convey assets to philanthropic causes is growing rapidly.  

A Final Thought

BTW: if you really wanted to continue to own that stock in Amazon, you could take the cash you had intended to gift to a charity and repurchase shares of stock at the current price and now have a higher basis in that stock for the future.

I hope you found this helpful.  If you have any questions on your charitable giving, please give us a call.

*Assumes a 25% capital gains rate.