LGT's Profit Sense

In my desire to be more philanthropic I began serving on a finance committee for a foundation. During this time, I was introduced to one of the most impactful giving tools—the donor advised fund. We were not independently wealthy individuals when my husband and I started our fund; for the record, we’re still not.

However, over the years since we established our fund, we have been able to give in ways we could not have imagined. Unprecedented times require selfless measures, but they don’t have to lack advantages. A donor advised fund is a perfect example.

What advantages make the donor advised fund a powerful giving tool?

• You can take the advantage of the appreciation in donated assets (held 1 year or longer) through a tax deduction at the asset’s fair value. Consider you purchase stock for $2,000. Two years later, the fair value of the stock has appreciated to $5,000. Selling the stock would result in taxable capital gains on the $3,000 appreciation. Contributing the stock to a donor advised fund allows you to get a tax deduction at the fair value of $5,000. At a 25% tax rate, this is a deduction of $1,250 resulting in a cash outflow of $750 ($2,000 cost - $1,250 tax deduction). In contrast, if you gave a $5,000 cash donation you would get the same tax deduction, but would have a cash flow of $3,750 ($5,000 - $1,250 tax deduction).
• The donor advised fund allows you to control the timing of your gifts. Consider our example above. If you can give the stock directly to a 501(c)(3) organization it is typically a single gift. What if the stock was worth $30,000 and you wanted to donate $10,000 a year over a 3 year period? When you contribute to a donor advised fund, you get the deduction in the year the asset is donated, however, you are able to make grants out of the fund as you identify needs youd like to support with few restrictions on the timing of the grants. Certain fund custodians (organizations that hold the actual assets of a donor advised fund) may have requirements for making grants; therefore, make sure you select a fund custodian based on your giving plan.
• Your donations grow tax-free in the fund and increase your giving power. This means more to give over time and creates an opportunity to make a bigger difference in our community and our world. Typically, donated assets are liquidated by the fund custodian and invested in asset allocation funds that provide for investment returns in the donor advised fund.
• Many donor advised funds can accept a large variety of donated assets, not just cash and stocks. Allowable donations are subject to the fund custodian but can include investments in privately held businesses, cryptocurrencies, oil and gas interests, life insurance, and more. Consider carefully when selecting the provider for your donor advised fund and review the listing of acceptable assets before you establish your fund.
• There are many options for giving. Fund custodians of donor advised funds vary from banks and financial institutions to community foundations. Many of these custodians offer assistance in researching and evaluating charities, provide philanthropy education, and grant access to give online. Select the custodian that best meets your needs.

In this time of crisis, not-for-profits need our help and support more than ever. Consider if a donor advised fund is right to increase the power of your giving.

LGT is not a custodian of donor advised funds. This article is informational only and does not advocate for one donor advised fund custodian over another.

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