When it comes to maximizing the impact of your charitable giving, Donor-Advised Funds (DAFs) are an increasingly popular vehicle. But not all donations are created equal. If your clients plan to contribute to a DAF, there is one golden rule to follow: always donate appreciated assets. Here’s why this strategy offers unmatched financial and philanthropic benefits.
What Appreciated Assets?
Of course, appreciated assets are investments—such as stocks, mutual funds, real estate, or cryptocurrency—that have significantly increased in value since they were acquired. If sold, these assets would typically trigger capital gains taxes, which could erode a portion of your client’s profit.
The Benefits of Donating Appreciated Assets to DAFs
Eliminate Capital Gains Taxes
By donating appreciated assets directly to a DAF, the client avoids paying capital gains taxes on the increase in value. This means that they have more to go toward their charitable goals rather than tax liabilities.
Example:Stock purchased for $10,000.
It’s now worth $50,000.
If sold, the client faces a 20% capital gains tax on the $40,000 gain, reducing their proceeds by $8,000.
By donating the stock to a DAF, they bypass this tax entirely, allowing the full $50,000 to fund charitable initiatives.
Maximize Your Client’s Tax Deduction
When a client donates appreciated assets to a DAF, they can claim a charitable deduction for the full fair market value of the asset—up to 30% of their adjusted gross income (AGI) for publicly traded securities. This means they enjoy a larger deduction than if they donated cash or after-tax proceeds from selling the asset.
Supercharge Your Client’s Charitable Impact
With more funds preserved through tax savings, your client’s donation has greater philanthropic reach. For example, an $8,000 tax savings (from avoiding capital gains) could help fund more meals for a food bank or additional scholarships for students.
Simplify Giving
DAFs are designed to handle complex assets like privately held business interests, real estate, or cryptocurrency. By transferring these appreciated assets directly to the DAF, you can offload the administrative burden and benefit from the fund’s expertise in liquidating them efficiently.
Compound Growth for Future Giving
Once the appreciated asset is liquidated within the DAF, the proceeds can be invested by the advisor, allowing the fund to grow tax-free. This means the initial donation could generate even more money over time, providing a sustainable source for future grants to your client’s favorite charities.
Why Cash Isn’t Always King
While cash donations are straightforward, they do not offer the same tax advantages as appreciated assets. When your clients donate cash, they miss out on the chance to avoid capital gains taxes and leverage a higher deduction.
What Types of Appreciated Assets Can Your Client Donate?
Publicly traded stocks and mutual funds
Real estate
Cryptocurrency
Private business interests
Restricted stock and IPO shares
Key Considerations Before Donating
Confirm Fair Market Value
Ensure the asset’s value is properly assessed, especially for non-publicly traded assets.Timing Is Critical
Assets must have been held for over a year to qualify for full fair market value deductions.Consult a Tax Advisor
Every financial situation is unique. A tax professional can help navigate contribution limits and ensure compliance with IRS guidelines.
Conclusion: Make the Most of Philanthropy
By donating appreciated assets to a DAF, you can help your client amplify your charitable impact and optimize their financial benefits. It is a win-win strategy that every savvy donor should embrace. Whether they are supporting local nonprofits or global initiatives, this approach ensures that they give smarter, grow their philanthropic footprint, and achieve greater tax savings.
