I know many people who are charitably minded, some giving more than 10% of their income to their church, donating large sums to a University or regularly contributing to a charity of choice. There are many tax advantages available to the donor, particularly a tax deduction on your income tax filing. One tax-efficient vehicle I regularly come across is a Donor Advised Fund (DAF). A DAF is a fund, that is a charity. The donor can make donations to the DAF and then direct the DAF to make a donation from the DAF to any 501C3 charity, including the American Red Cross, United Way, Habitat for Humanity, religious organizations, educational institutions, and more. You can set up a DAF at a number of financial institutions, including banks, brokerage firms, and others with as little as a few thousand dollars. Fidelity’s platform is by far the easiest to navigate. You can visit their website to learn more: www.fidelitycharitable.org. (I do NOT receive a commission for endorsing Fidelity).
What is unique about a Donor Advised Fund is that the moment you donate to the DAF, the donor (you) realize a charitable tax deduction because the DAF is a charity. The DAF can hold cash, public securities, private securities, and more. And while the funds sit in the DAF account, you can invest those funds in other securities and grow the value in the DAF. Then, when you deem it appropriate, you can direct the DAF to make a donation to the charity of choice.
Why the complexity? Why the additional layer? Well, if you are facing a large liquidity event and plan to donate a portion of those proceeds to a charity, say 10% to your church, then completing a few tasks prior to closing on the transaction can save you a LOT of money. Here is an example that I have seen in the marketplace that considers donating appreciated private company stock to a DAF prior to the sale of the business. Then, when the business is sold, the buyer purchases the shares from all sellers, including the DAF. Now the DAF account is fully liquid with cash and the donor can direct those funds to his/her church or any other charity or charity of choice.
This is a hypothetical example for illustrative purposes only. The chart assumes that the donor is in the 37% federal income bracket and will itemize deductions. State and local taxes and the federal alternative minimum tax are not taken into account. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice. Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any.
Donating the private company stock prior to the DAF sale rather than donating cash after the sale saves the donor nearly $1.2 million! The more the donor donates, the more tax savings the donor realizes. For those who are charitably minded individuals, this structure is tremendous. There are some important issues to consider when donating the private company stock prior to a transaction, so please consult your tax attorney. But appropriately navigating those issues allows the donor to realize some attractive savings while fulfilling the donor’s giving objectives.
I’m happy to discuss any questions you may have on this structure. I also partner with several legal and tax advisors who can help determine if this structure is right for you.