Using a donor advised fund before the year ends
As the year end approaches, many families review ways to reduce the impact of taxes. For example, using a donor advised fund before the year ends may help charitably minded investors.
In our view, a donor advised fund can be a convenient way to support favorite charities while managing taxes. You can donate appreciated securities and generally avoid capital gains tax on them. In addition, donors who itemize may deduct the fair market value of securities held over one year, within income limits. As a result, you can contribute in a high income year and recommend grants over later years. However, gifts are irrevocable, and the sponsor has final control over grants.
A hypothetical example
Suppose an investor bought shares of one stock for $100,000, and they are now worth $400,000. Donating the shares to a donor advised fund may support a $400,000 deduction. However, the 30% of AGI limit may spread that deduction over several years. At an assumed 35% tax rate, the deduction could cut income taxes by about $140,000. In addition, avoiding a 20% tax on the $300,000 gain could save about $60,000, or roughly $200,000 in total. Of course, the investor still gives away $400,000 of assets. This illustration ignores state taxes, the 3.8% net investment income tax, and personal circumstances.
Convenience and efficiency
A donor advised fund lets you centralize charitable giving. For instance, you can contribute, recommend grants, and track giving in one account. At tax time, you typically receive one statement, which may simplify preparation. Keep in mind that most sponsors charge fees, and investment options vary.
Income limits
Cash gifts to a donor advised fund are generally deductible up to 60% of adjusted gross income (AGI). In contrast, appreciated securities are generally deductible up to 30% of AGI. You can carry any excess forward for up to five years. Finally, recent legislation changes some deduction rules starting in 2026, so confirm current limits with your tax professional.
Tax free growth
The sponsor can invest the fund’s assets, and any growth is tax free. In other words, more money may be available for future grants. However, investments can lose value, and growth does not add to your deduction.
Timing tips for using a donor advised fund before the year ends
Most importantly, gifts generally must be complete by December 31 to count for that tax year. Securities transfers can take several days. Therefore, if you are using a donor advised fund before the year ends, start early and confirm the sponsor’s cutoff.
Before you transfer shares, review your cost basis with your advisor. For example, lots held over one year with the largest gains may offer the most benefit, because you avoid more capital gains tax. Meanwhile, shares that have lost value may work better if you sell them first, since a sale may let you claim the loss. Your tax professional can help you weigh these choices.
Questions to ask a sponsor
First, ask about the minimum initial contribution, since requirements differ widely among sponsors. Next, review the fee schedule and the investment menu. Some sponsors also set a minimum grant size, so check that amount before you plan smaller gifts. In addition, confirm which assets the sponsor accepts. Many sponsors accept cash and publicly traded securities, while fewer accept complex assets. Finally, ask whether you can name successor advisors to continue your giving plan.
Main benefits and limitations
- No capital gains tax on appreciated securities you donate.
- Potential tax free growth, though values can fall.
- Flexibility to contribute now and recommend grants later.
- Irrevocable gifts, sponsor fees, and sponsor approval of grants.
This content is for informational and educational purposes only. It discusses hypothetical tax benefits and limitations that may not apply to your situation. Activest Wealth Management, LLC does not provide legal or tax advice. Please consult your tax professional regarding your specific situation.
