Donor Advised Funds - A Growing Phenomena
According to the National Philanthropic Trust, donor-advised funds are the fastest growing charitable giving vehicle, with more than 100,000 donor-advised accounts established and holding over $18 billion in assets.
One reason that donor advised funds have grown so rapidly in recent years is the convenience and full tax advantage donors have realized by donating appreciated securities to the fund. Donors avoid the inconvenience of transferring non-cash assets to several organizations because the fund takes care of these details, and obtain a greater tax benefit than when making cash donations.
Donors of appreciated securities or other assets can claim a tax deduction for the market value of the donation and avoid capital gains taxes. This double tax advantage makes donating appreciated assets to a charitable organization more attractive than selling the assets and donating cash, as shown in the following example.
Tax Efficiency Example
Suppose you have 1,000 shares of stock that you purchased 15 years ago (thus, are long-term capital gain property). Assume that you purchased the stock for $10 per share and it is now worth $100 per share. Now, let's compare the cost to the donor of making a contribution of $100,000 to a charity of your choice. We assume a 45% income tax rate (federal and state combined) and 25% long term capital gain tax rate.
Option 1: Contribute cash from sale of securities
- Immediate cost to you: $100,000
- Capital gains tax incurred: $22,500 (25% times $90,000 gain)
- Income tax saved: ($45,000) (45% times $100,000 deduction)
Net cost to donor: $77,500
Option 2: Contribute appreciated securities to Donor Advised Fund
- Immediate cost of donation: $100,000
- Capital gains tax incurred: N/A
- Income tax saved: ($45,000) (45% times $100,000)
Net cost to donor: $55,000
Thus, you can make a $100,000 contribution at a cost to you of $55,000 using a Donor Advised Fund, saving $27,500 over the traditional method of donation.
