Using a Donor Advised Fund

Last week we looked at how to have your cake and eat it too and not gain weight. Well, not exactly, but we saw how you could gift appreciated stock to a charity, and both avoid taxes on the capital gains, get a deduction of the gift, and help the cause you are interested in. (This trick works with a lot of assets, not just stocks.) 

But what if you have a large position with a lot of gains you want to get rid of, but it’s more than you want to give to charity this year. Of course you could just make partial gifts over many years, but what if you want all of the tax deduction now? 

A decade ago, I let you in on a way to do this and I thought I’d repeat it in case you have forgotten: The Donor Advised Fund. 

What is it? It represents a donation you make to a charity where you advise the charity what to do with it. For instance, here in Wichita Falls, Texas, we have an entity called the Wichita Falls Area Community Foundation (WFACF). You could set up a Donor Advised Fund with them and then contribute money, stocks, or other securities to it. Since they are a charitable organization, your contribution is immediately tax-deductible. But, as part of a Donor Advised Fund, you are allowed to advise them how to distribute the money. 

Let's say you have some Apple Computer stock in your portfolio. When you bought it many years ago, it cost you $5,000. Now it's worth $25,000. Good for you. But if you sold it, you'd owe Uncle Sam taxes on that $20,000 gain. That makes you sad. You wanted to use all $25,000 to help the local Literacy Council teach people to read by donating $5000 each year for the next five years. What to do, what to do? 

Simple: Gift the stock to your Donor Advised Fund. Since you've owned the stock over a year, you get to claim all $25,000 as a charitable contribution this year. They will sell the stock, but being a charity, they won't owe any taxes on the sale. You can then direct them to give $5000 each year to the Wichita Adult Literacy Council. They earn a small fee for handling this which they then use for their own in-area charitable purposes. You're happy, the Literacy Council is happy, and the Community Foundation is happy. Problems solved! 

The only “catch”: The Foundation doesn't technically have to follow your advice. However, this danger is pretty slim. They would rather ensure your repeated gifting to their foundation. They also wouldn’t want to jeopardize their reputation in the community. 

Personally, I use a Donor Advised Fund at the Wichita Falls Area Community Foundation for the majority of my charitable giving. I can write them one check or donate other assets and they then write all the smaller checks to the various charities I like to support. It even simplifies the number of receipts I must keep up with come tax time. Investigate for yourself and see if a Donor Advised Fund might work for you.