Diversification solution for the charitably inclined
Raymond James believes it’s important for investors to understand the value of a diversified portfolio. But many investors, for a variety of reasons, find themselves with a concentration of stock, which can create increased risk and portfolio volatility. Selling the stock provides a solution, but may not be ideal depending upon the tax implications, especially if the stock has a low cost basis. For investors who are philanthropically inclined, a DAF may be a sound strategy with many benefits.
Donating a portion of the concentrated stock through a DAF provides the ability to make a larger donation than giving cash after liquidating. The investor avoids capital gains taxes on the appreciated amount that would have been incurred if the stock were sold, and receives a tax deduction for the full fair-market value of the long-term capital gain – up to 30% of adjusted gross income. Donating to a DAF provides other great benefits, such as the potential for the donation to grow tax-free and distribute out to charities over a period of time.
A STRATEGY FOR KEEPING HIGH-PERFORMING STOCK
Stocks that perform well are attractive, but can create a tax challenge due to appreciation. An investor who wants to keep high-performing shares in a portfolio, and also intends to be charitable, can donate the shares to a DAF for the full current market value instead of gifting cash, then buy new shares of the same security. The newly acquired shares will have a higher cost basis than the original, minimizing future tax liability if they are sold and maximizing current tax advantages for donating the original shares.
A STRATEGY FOR FUTURE GIVING
A DAF provides tax advantages today that can help fund giving tomorrow – such as an investor who wants to continue a high level of giving in retirement or a donor trying to build a substantial gift to a favorite nonprofit. How? By enabling donors to offset higher than normal income years with a larger than normal donation to a DAF. Several events can create higher than normal income years:
- Exercising stock options
- Selling and diversifying a concentrated low cost-basis stock position
- An inheritance
- Selling real estate or a business (business exit)
- Receiving a large bonus or severance package
Once the donation to the DAF is made, the gift can grow tax-free and the donor can decide how the funds will be distributed throughout future years.
THE MULTIDIMENSIONAL DAF
Additional benefits of DAFs include the ability to make contributions whenever you please and claim the tax deduction when it works best for you and your financial plan. A DAF can also be an easy and cost-efficient way to get multiple generations involved in your family’s philanthropic endeavors. There are several factors to take into account when deciding how best to share your wealth. Your financial advisor can discuss the many options with you to find the best path for you, your family and your financial plan.
Diversification does not guarantee a profit nor protect against a loss. Raymond James advisors do not provide tax and legal advice.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.
To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.