Are Donor Advised Funds Right For You?

Donor Advised Funds or DAFs have been around for a while. The first ones were set up in the 1930s and Congress gave them formal standing in 1969. They may be one of the most advantageous tax strategies you’ve never heard of.

The structure is pretty simple. You set up an account with a qualified record-keeper and you fund the account with cash or securities. Like regular donations to charity, you get to take a tax deduction for the amount contributed. Once the account is funded, you make disbursements over time out of the fund to federally recognized charities. Pretty simple.

But those two key features – the ability to give over time and to contribute appreciated securities can provide some good tax planning options.

So let’s look at two examples of how the tax advantages can add up.

First, let’s assume you work for a company and in a particular year you earn a big bonus which results in a big bump in income. That boost in income is going to drive your taxes and maybe even your tax rate up. Let’s assume that you typically give $1,000 a year to all charities in your life combined. We’ll also assume that your bonus was $50,000.

So, you could do what you always do and donate $1,000 in gifts for the year. Or, you could donate $10,000 to a DAF and take a $10,000 deduction this year to offset your extra $50,000 in income. Then, distribute that $10,000, say $1,000 a year, for the next 10 years. The benefit is that your tax deduction is ten times bigger (say $3,000 vs. $300 in this example). So you have a big deduction to offset the increased taxes on your big bonus.

Another advantage is that you can invest that $10,000 in a variety of investments and if those investments that you’ve chosen do well, you will be able to give more than the original $10,000 you contributed, perhaps much more.

Here’s another common example.

Say you bought 400 shares of a tech stock for $10 and it ends up going way up in value to $50 and you determine that it’s time to sell. Guess who’s coming for capital gains taxes? You know who. So one option is to gift some or all of the appreciated shares directly into the DAF. When you do that, you completely avoid the capital gains tax and again, you now have the ability to invest the money, allow it to grow and disburse it over time. In this case let’s say you sold ½ for $10,000 and gave the other $10,000 to the DAF. Great, now you’ve got your next 10 years of giving all lined up and you only paid $1,600 in capital gains taxes vs. $3,200.

Everyone has a unique financial and charitable giving strategy and these accounts aren’t for everyone. Furthermore, there are state tax laws and restrictions that may make them inappropriate for your situation, so it’s best to discuss your specific tax situation with your tax advisor or accountant, but if you would like to learn more about DAF accounts or the investment aspects of the DAF account, we’d be happy to help.

Jason Haviland, CFA, CEBS, PMP is the President and Founder of J. Bradford Investment Management in Nashua, NH. For more information, please visit www.jbradfordinvestments.com/about

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