Video 5

Donor Advised Fund

Use this SUPER vehicle to never pay long-term capital gains tax and possibly eliminate income tax.

To-Do

There are over 1000 donor advised funds (DAF) in the United States.

Most custodians like Fidelity, Schwab, or Merrill Lynch have their own donor advised funds (DAF) inside their investment structure. Christian oriented donor advised funds include the National Christian Foundation, Waterstone, and Barnabas. Most larger communities have their own area foundation with DAF.

You can go to their websites and open up a donor fund. It can take as little as 10 minutes.

The smartest way to fund a donor advised fund is with highly appreciated, long-term assets.

As referenced in the video; share with your investment advisor that if you’re ever close to selling a large gain, maximize the tax benefits by gifting that stock into your donor advised fund. Notifiy your donor advised fund that you wish to transfer certain shares to them.

To optimize your donation, go online and click to expand your stock position so it shows all the different lots or buying positions and sort to find the positions that have the largest gain or lowest cost basis. To further explain this, you may have purchased a stock over several different time frames. If you had your dividends reinvested, each new stock purchase would have a different cost basis.  Each of those various purchases are called a “lot”. So instructing your custodian what position you want to gift, be very specific and identify the number of shares, the lot and the date it was purchased.

If your donor advised fund is located where your present portfolio is custodian it’s a very simple transfer between your personal account to your donor advised fund. If it is moving from your custodian to a different donor advised fund that does not custodian with the same broker, you may have to get further paperwork, including a signature medallion guarantee. 

Custodians are legitimately concerned about fraud. For your own protection, they might add this step.

With your donor advised fund (DAF), you’ll advise your DAF to make a gift on your behalf  to your desired charities. Custodians will make certain the charity is in good standing with the IRS. Some secular DAF might add their own world view overlay and may not want gifts going to things like certain Christian charities. The National Christian Foundation, Waterstone and Barnabas will not make gifts to causes that are antithetical to Christianity. So, 

please ask your custodian under what conditions they would not honor your donor’s request.

In making that gift to your nonprofit, it can be a one-time gift, or an ongoing gift. It can be given with acknowledgment or anonymously. The online gift recommendation process could take as little as two minutes. No more finding the checkbook, addressing envelopes, finding a stamp, etc.

More sophisticated DAF have the ability to accept non-security assets. These could include a business, royalty interest, real estate, etc. The donation could be a partial interest in these assets.

I’ve seen business owners who are growing massive businesses and have little of their own spare cash, give an interest in their business every year.

It results in a larger and larger, giving fund for them while holding down their taxes. Of course, the nonprofit is typically going to accept these with the objective of an immediate sale. You cannot be under a hard earnest money contract for the sale of that asset before you structure the donation. Appraisals are required, but this can be one of the most incredible ways to move a chunk of your net worth into nonprofit causes and save substantial taxes.

Don’t wait to take advantage of this and only give out of your estate. While, that might save estate taxes, it will not save you income tax.

One of the most powerful ways to optimize your donor advised fund is to gift while you’re still working and in high tax brackets. You’re saving income tax now, you’re moving assets out of your taxable estate, you are moving assets from a creditor attachable account into a tax exempt account. On the gains and interest taking place in your taxable accounts, you’re paying taxes.

All the funds inside your DAF are growing completely tax-free.

Many people use a DAF to practice “bundling”. That is, giving much more than their normal annual amount to be able to itemize the charitable deduction.  With lower levels of giving and the present higher standard deduction, one’s charitable gifts may not even be tax deductible.  Only 10% of taxpayers itemize.  When you filled up your giving bucket or your donor advised fund, do all your gifting from your donor advised fund.

Because what’s in our checking account has already realized the income tax or capital gains tax those checks are giving with after tax dollars that you may not be able to deduct.

Bundling can often result in giving with whole dollars and save your marginal tax rate which for many could be in the 37% plus bracket.