Donor-Advised Funds

Charitable Planning Blog - JLFranklin Wealth Planning

Donating stock instead of cash to fund your charitable giving can increase your wealth. If you hold low-basis securities (i.e., stocks or funds acquired for much less than they’re worth today), consider using them to fund the majority of your charitable donations.

In most cases, you can reduce your taxable income by the amount of gifts made to charity. For example, if you’re in the 40% combined federal and state tax bracket, you would generally receive $400 in tax savings from a $1,000 charitable contribution. A donation of stock that is worth more than when it was purchased (or received) and held at least one year yields a greater tax benefit than a cash donation. Such gifts of appreciated stock are deductible at the fair market value, effectively allowing you to avoid paying taxes on the capital gain (appreciation).

The table below illustrates the benefit of donating appreciated stock to charity. In the example, an individual donates stock or mutual funds valued at $40,000, with a cost basis of $10,000, to a charity. The “Gift of Appreciated Stock or Funds” column shows the net cost of the gift is $24,000. Compare this to the “Gift of Cash” column to see the tax treatment of selling the shares and then donating the net sales proceeds to the charity, which would cost you $30,000, thereby increasing your transaction cost by $6,000.

Comparing Charitable Gifts: Stock Versus Cash

Tax Savings Gift of Appreciated Stock or Funds Gift of Cash from Sale of Shares
Contribution Amount (Tax Deduction) $40,000 $40,000
Tax Benefit of Contribution
($40,000 * 40%)
(16,000) (16,000)
Tax on long-term capital gain from sale of investment ($30,000 * 20%) (a) 0 6,000
Net cost of gift $24,000 $30,000

(a) Assumes a 20% combined federal and state long-term capital gain tax rate.

You can make gifts of appreciated securities directly to a qualified charity or to a donor-advised charitable fund. A donor-advised fund offers some unique benefits, including:

  • Reduced paperwork—You can eliminate most of the paperwork of security transfers to multiple charities. Once you make a donation of a block of securities to the donor-advised fund, you can parcel out individual donations later.
  • Take a Tax Deduction Before Granting Gifts to Charities—Donors recognize a tax deduction for transfers made to the fund in the current tax year, while transfers to individual charities can be made in the current year or in future years. This strategy works well if you expect to be in a lower tax bracket in future years and want to keep the amount of your charitable contributions steady.

Donor-advised funds operate much like a private foundation, without the tax return filing requirements. While individuals may contribute cash, contributing stock or mutual funds held for more than one year yields the biggest tax benefit. Once an investment is received by the “sponsoring organization,” such as Schwab or a community foundation, the security transferred is liquidated and placed into one or more pooled accounts selected by you or your advisor. You can then use these funds to make cash donations.

Tax note: Under current tax law, a gift of appreciated stock to a charity can be deducted in the amount of 30% of your adjusted gross income (AGI); cash gifts to charities can be deducted for up to 50% of your AGI. If you make a gift in excess of these amounts, you may carry forward the deduction for five years.

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