Philanthropy is a key component of wealth management planning, with many strategies featuring at least one charitable component. Many wealthy individuals also chose to further diversify their giving by using a variety of financial tools. A donor-advised fund, or DAF, provides the opportunity to donate various assets to charity with immediate tax benefits. However, these funds are not without drawbacks for certain wealth management styles.
Donor-advised funds and the IRS
The benefits of directing charitable contributions to a donor-advised fund are very direct at tax time. Taxes are not assessed on your profits. For example, if you want to donate 10 shares of a stock valued at $1,000 to a local shelter, you can place all the stock in a DAF. Your charitable contribution for tax purposes is the full value of the stock. The full value of the stock, fewer fees, also goes to your charities.
Should you decide to sell the stock and donate cash, you would lessen the impact of your gift. Capital gains taxes would need to be paid on any profits. For contributions limited to the stock sale, the taxes would be deducted from the final donation, reducing the dollar value of your gift.
Hands-on or hands-off?
A donor-advised fund makes it possible for you to significantly invest in charities over time. A donation into the fund of stocks or other assets can transition into a steady stream of income for the organizations, and the dollars can be disbursed at your will.
According to the IRS, a donor-advised fund provides the donor with the ability to advise how funds should be distributed and invested. You can direct your wealth management advisor to choose charities aligned with your principles. This eliminates the need for handling routine transactions while making sure your favorite organizations, such as humane societies or soup kitchens, are covered.
After your assets are placed in a DAF, they appreciate tax-free. You can direct the sale of stocks for a profit or sell a piece of real estate with a soaring price tag. No taxes are due on the growth, and the charities of your choice receive additional benefits from your investments.
Many DAFs operate without a problem, but it is still important to consult with your wealth management advisor to find the right firm. Hidden fees and other charges can eat away at your profits with the wrong DAF. Others may attempt to limit your ability to self-direct your funds. Research the management of any fund and ask for a full fee chart before transferring assets.
Contact a wealth management company near you in order to learn more.