An end of year planning opportunity: Donor-Advised Funds

A donor-advised fund (“DAF”) is a separately funded or account that is maintained and operated by a §501(c)(3) organization, which is referred to as a sponsoring organization; consider it a charitable investment account. Once a donor makes a contribution, the sponsoring organization has legal control over it. However, you, as the donor (or your representative) retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Any contribution to the DAF is tax deductible for the year in which the contribution is made.

How does a DAF work?

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You can set up a DAF with your financial advisor or online. You the donor, can contribute cash, securities, real estate, or some privately held stock. These investments can grow over time giving you the ability to give more away to charity then you initially contributed. Your contribution can support one or multiple qualified 501(c)(3) charities over time.

How can you maximize the tax benefits?

As previously stated, your contribution to the DAF entitles you to an immediate tax deduction.

But if you contribute highly appreciated securities, you can avoid paying a capital gains tax on the sale of those securities and your deduction is based on the fair market value of those securities.

For example:

You hold XYZ stock with a basis of $10,000 (what you paid for it) and it is now worth $50,000 (fair market value).

If you sell the XYZ stock, you will pay a capital gains tax on the $40,000 gain. This could amount to a 30% tax (federal and state). The capital gains tax on this sale could be $12,000.

If you contribute the XYZ stock to a DAF and it is sold, there is no capital gains tax recognized. Additionally, you will get a deduction on the $50,000 contribution.

The tax deduction can help mitigate the tax burden for someone who recently sold a business. In this situation there should be a large amount of income, and thus a large income tax bill. Contributing to a DAF can help offset the tax burden while allowing you to control the investments in the DAF and dolling out contributions to 501(c)(3) organizations over time.

Additional benefits of a DAF

Like many of my clients and friends, multiple charitable organizations solicit us each year. It’s time consuming and often difficult to manage the bookkeeping of numerous asks. By setting up a IDAF,. it allows you to streamline and budget for your yearly charitable contributions while only reporting one letter to the IRS.

Think of a DAF as a “Foundation-lite;” You control the beneficiaries of your contributions over time, yet you are not subject to the same strict guidelines and compliance requirements of a Foundation. It is also a nice legacy to leave behind for your children.

At this time of year when giving is on many people’s minds, a DAF can allow your generosity to multiply and directly benefit your intended charity, as well as indirectly have a positive impact on your tax implications.

Avelino & Hartlaub, LLP is a boutique firm with primary practice areas that include: Real Estate; Wills, Trusts and Estates; Elder Law; Corporate Law; Land Use & Zoning; and Litigation. While the scope of the firm's services is wide, a key differentiator of the new firm is the insight, dedication to excellence, and commitment to client service within each area.

Avelino & Hartlaub, LLP has offices in Summit, at 47 River Road, and in Manhattan at 11 Park Place, Suite 1715. For more information, including a free and private consultation, call 908-273-5730 or contact