At Welch Hornsby, we understand how our clients look to make an impact in their communities by regularly contributing to various charitable organizations.
While gifting appreciated securities has long been a tax-efficient way to donate to charities, we have more frequently been advising our clients on the process of establishing donor advised funds to streamline their charitable giving.
The utilization of donor advised funds, or DAFs, has been on the rise in recent years. From 2016 to 2017, the number of DAFs grew 60 percent, according to the 2018 DAF Report from National Philanthropic Trust. Subsequently, the number of grants from DAFs grew 20 percent, totaling $19.08 billion in grants to qualified charities.
So, what is a DAF, and how should you approach these options for charitable giving?
DAFs are charitable organizations to which someone can contribute appreciated securities in return for a tax deduction in the current year. From their DAF account, the donor can then choose where and when their contributions are given.
When making appreciated stock gifts, donors have two primary options: send direct stock gifts to the various charities or use a DAF to make a gift. In either case they receive the same tax benefit. Consider this example. Assume you would like to donate $25,000 of an appreciated stock with a basis of $5,000 in amounts of $2,500 to your 10 favorite charities. By doing this, you will save about $20,000 in long-term capital gains (and $4,000 in taxes at a 20% tax rate).
Giving stock directly comes with many logistical challenges, such as paperwork for each individual stock gift to each charity, a fluctuating donation amount due to stock value changes between the time you decide to make the gift and the time the stock reaches the charity, keeping up with each gift for tax purposes and the receiving brokerage firm having to identify the donor.
On the other hand, using a DAF creates many advantages. Firstly, you can receive an immediate deduction for making the $25,000 gift by transferring the shares on one day – at the same price – to the DAF. You will receive credit for the price of the security on the day of the transfer, instead of waiting for 10 different $2,500 direct stock gifts to be made over a series of days at differing prices, and the charity to send you a gift acknowledgement letter. This eliminates what can be a mess to track for you and your accountant by reducing the taxable gifts to track from ten to one under this scenario.
Secondly, if you make the gift to the DAF towards the end of the calendar year, you can receive the tax benefit in the year you contributed to the DAF but not be rushed to get the money out to each of the charities that same calendar year. You can distribute directly to each charity in January of the following year or anytime you desire.
There are many DAF options; such as local community foundations in most metro areas, the National Christian Foundation, or Schwab Charitable, just to name a couple.
If you are interested in learning more about DAFs and how can you incorporate them into your wealth management strategy, contact us today.
The information and data contained herein has been obtained from sources believed to be reliable, but is in no way guaranteed by Welch Hornsby as to its accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.
Written by John P. Maloney, CFA
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