A Simple Strategy for Achieving Clients’ Charitable Goals: the Donor-Advised Fund

A DAF is a charitable account administered by a sponsoring public charity that allows the client, as the grant advisor to the fund, to make donations to qualified charities. The DAF can be funded with many types of assets, not just cash. Once the DAF is funded, the client receives an immediate income tax deduction equal to the value of the donation, and you, as the advisor, can now manage the DAF assets in line with your client’s objectives.   

Let’s look at an example.

John Smith typically writes checks totaling approximately $3,000 throughout the year in support of various charitable causes. John also has $300,000 in a nonqualified investment portfolio, which contains shares of ABC. The shares are valued at $30,000, with a cost basis of $10,000, and he has owned them for more than one year. 

Under the guidance of his advisor, John establishes a DAF and funds the account with his shares of ABC. The advisor then sells the ABC shares and reallocates the proceeds into a balanced portfolio. Now, when John wants to donate to charity, he can submit a grant request to the DAF, and the charity sponsoring the DAF will send a check to the qualified organization.

The Benefits of a Donor-Advised Fund 

How does John benefit from establishing the DAF?

1. John receives a $30,000 income tax deduction, which he can use to offset his taxable income.
2. When the ABC shares are sold, John does not realize any capital gain tax because the DAF is tax-exempt.
3. John’s advisor can tailor the DAF portfolio for growth, based on John’s goal to continue benefiting charitable organizations.  
4. John no longer has to make donations from his current cash flow, as he has “front-loaded” his charitable donations for the next several years.
5. If John still wants to own ABC in his nonqualified portfolio, he can repurchase the shares at a higher basis. This may reduce the amount of capital gain to be paid in the future or provide an opportunity for tax-loss harvesting. 

This is a simple example of how you might incorporate a DAF into your clients’ financial plans. If you aspire to provide your clients with comprehensive financial planning, be sure that you include charitable giving goals in your discussions. You might be surprised to learn how many clients care about this topic. Stay tuned to learn about additional strategies that you may find helpful in your planning practice.