How donor advised funds reduce taxes on appreciated stock
On November 21, 2024, Activest hosted a webinar, “Reducing Taxes While Building Your Legacy.” It explored how donor advised funds reduce taxes on appreciated stock. In addition, it covered how a donor advised fund (DAF) may connect giving with tax planning.
Shannon Sullivan, Director at Fidelity Charitable, joined Jacob Taurel, Managing Partner at Activest Wealth Management. Next, they walked through three ways a DAF can change giving.
The discussion focused on practical planning rather than product promotion. For example, the speakers described how timing, asset selection and charitable goals can work together. This recap summarizes the main ideas. It also covers the limits that donors should weigh before they act.
How donor advised funds reduce taxes on appreciated stock
Donors who give long-term appreciated securities to a DAF generally owe no capital gains tax on the gain. As a result, more value can reach charity. However, the gift is irrevocable, and IRS rules generally cap this deduction at 30% of adjusted gross income.
Consider the alternative. If a donor sells appreciated stock first and then gives the cash, the sale may trigger capital gains tax. As a result, less money remains for the gift. In contrast, contributing the shares directly avoids that sale in the donor’s own account. The donor may also claim a charitable deduction, subject to IRS limits and personal circumstances.
In other words, understanding how donor advised funds reduce taxes on appreciated stock starts with one choice: give the shares, not the proceeds. Of course, each donor’s cost basis, holding period and income differ. The benefit therefore varies from person to person.
Which assets tend to fit
Long-term holdings with large unrealized gains are often natural candidates. For instance, an investor may hold a concentrated position that has grown over many years. Giving part of that position can reduce the gain the investor would otherwise realize. Meanwhile, the donor keeps other holdings intact. Donors should confirm with the sponsor which securities it accepts, since policies can differ.
Bunching itemized deductions
For instance, a donor may combine several years of gifts into one contribution. In practice, this helps only if total itemized deductions would then exceed the standard deduction.
Many households take the standard deduction each year, so annual gifts may bring little tax benefit. Instead, bunching concentrates giving into a single tax year. The donor can then recommend grants from the DAF to favorite charities over the following years. Therefore, charities can still receive steady support even though the contribution happened all at once.
Tax free growth
The sponsor invests DAF assets, and any growth is tax free until the donor recommends grants. Of course, investments can lose value, and sponsors charge fees.
This feature can let a charitable account grow before the donor chooses where it goes. For example, a family may involve children in grant decisions over time. That habit can turn giving into a shared tradition. However, growth is never guaranteed. Donors should review the sponsor’s investment options and fee schedule before contributing.
Limits every donor should weigh
The webinar also stressed the trade-offs. First, a DAF contribution is irrevocable, so the donor gives up ownership of the assets. Next, the donor recommends grants, and the sponsor must approve them. In addition, deduction limits tied to adjusted gross income may reduce the benefit in a given year. Finally, fees and market losses can shrink the balance available for charity.
Above all, families should match the strategy to their goals. A DAF offers flexibility and simplicity for many donors. Still, it is not the right fit for everyone.
Who this approach may suit
For investors who want to learn how donor advised funds reduce taxes on appreciated stock, a conversation with their advisors is a sensible next step. Fortunately, a clear plan can make that conversation more productive.
Activest built the session for investors holding appreciated assets. In our view, a thoughtful giving plan can support both financial and charitable goals. Therefore, consult a tax advisor before acting. This content is educational, not individual advice.
