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Maximizing the Benefits of a Donor Advised Fund

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The changing tax landscape in America over the last few years has opened new doors of opportunity for Americans. One of the major changes to the tax code has been the standard deduction. The IRS raised the standard deduction dramatically and has made it harder for Americans to achieve the ability to itemize their deductions. As a result, the popularity of donor advised funds has thrived.

What is a Donor Advised Fund?

Donor advised funds were created to optimize the ability to donate to charitable causes. (Also referred to as a DAF for short.) When a contribution is made to establish the fund, several tax consequences can result. First, the contribution to the DAF counts towards the taxpayer’s charitable donations during the year it is made. Second, the taxpayer can avoid paying capital gains tax on appreciated stock that is sold within the DAF. This is especially beneficial to our clients who hold highly appreciated stock through their employer. Once the funds have been donated to the DAF the donor has the ability to invest the fund as they see fit. Additionally, any growth on the investment is tax-free. This can provide the opportunity for more capital to distribute for the donor. Lastly, the donor can select which qualified charitable causes they would like to donate the funds to. They can set up a schedule if they choose to do so or contribute as they see fit. They can also adjust the dollar amount for each of these donations. Not only does the donor receive all of these tax benefits from the DAF, more importantly, they are able to make an impact on charitable causes that they are passionate about.

What is Bunching?

Often times, you will hear the term “bunching” related to donor advised funds. Bunching is a strategy to help the donor itemize and receive a higher tax deduction than the standard deduction. In order to explain how this works, let’s look at an example together: Riley is a single taxpayer who typically donates $5,000 per year to charity. The standard deduction for a single taxpayer is $12,200 for 2019. This year, he bunches his charitable donations for the next 3 years and donates $15,000 to a DAF. Because this is $2,800 more than the standard deduction, this makes it beneficial for Riley to itemize his deductions for the year. Then, he is able to continue to make his regular charitable donations in the future. Instead of coming from his checking account in the future, the donations to the qualified charities will come from his DAF. He receives the credit for making these donations with his initial donation to the DAF. In addition, if the investments within the DAF grow, he has the potential to donate a larger amount over the next 3 years to these qualified charities he cherishes.

Who Can Benefit from the Strategies?

               This strategy can benefit all clients who are looking to make an impact on their total tax deductions. As I mentioned previously, our clients who have highly appreciated stock typically benefit the most from this strategy. They often own stock from their employer with a low cost basis and large unrealized gains. This can present a predicament in which they need to find a strategy to diversify their portfolio away from their holding in the stock while minimizing as much capital gains tax as possible. The beauty of using a DAF in the plan is that it allows them to donate the stock and avoid paying capital gains tax completely after the stock is sold within the DAF. If this has been something you have been thinking about, we are happy to discuss how this strategy could look within your financial plan.

Here at Falcon Wealth Advisors, we are not tax professionals, nor are we claiming to be. Rather, we implement forward-looking strategies to optimize our client’s tax planning within their financial plan. We are happy to partner with your trusted tax professional or help you establish a relationship with one in order to partner and implement the strategies into your plan. If the strategies within this blog are of interest to you, we are happy to answer any questions you may have as well. A great place to start is by emailing me at matt@falconwealthadvisors.com.

For more information on tax planning strategies, be sure to watch Matt and Jake’s discussion on year-end tax planning strategies:

-Matt Johnson

HighTower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor before establishing a retirement plan.

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Falcon Wealth Advisors is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.