SpaceX went public in June in what is being called the largest IPO in history, and other large IPOs are not far behind.
Even for investors who don’t hold a single share of any of those companies, the past 12 months have been strong. Markets have climbed steadily, with technology stocks leading the way. A lot of people are sitting on gains — and many of them are likely thinking about taxes.
For investors with appreciated stock, that tax exposure also creates a giving opportunity, and a donor-advised fund (DAF) is one of the most effective tools to act on it.
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At DAFgiving360, one of the nation’s largest DAF providers and where I am the director of the Charitable Strategies Group, we’re having these conversations regularly with donors and advisers.
While DAFs have been growing in popularity in recent years, many investors may not realize the role charitable giving can play in their overall tax and wealth management planning. A DAF isn’t just a charitable giving vehicle — it can be a tax and investment management tool with significant charitable outcomes.
For anyone holding appreciated non-cash assets such as stock, a private business interest or real estate, donating the assets directly to a DAF can unlock additional funds for charity in two ways:
- You can potentially eliminate the capital gains taxes that would be incurred if the assets were sold first and then donate the proceeds — which can increase the amount available to charity by up to 20%
- You may claim a fair market value charitable deduction for the tax year in which the contribution is made
Why a donor-advised fund is often the right vehicle
Most charities are not equipped to receive stock directly, particularly stock that comes with complexity: Shares subject to lockup restrictions, concentrated positions in newly public companies, equity compensation awards or holdings in private companies.
That’s where a DAF becomes even more useful to both the donor and the receiving charity.
A DAF is a 501(c)(3) public charity that accepts the contribution on your behalf, handles the valuation and liquidation of the asset and holds the proceeds in your account.
A donor takes the tax deduction in the year they contribute (if they itemize deductions), and the contribution is invested for tax-free growth — creating additional available dollars for charity.
Then, on their own timeline — this month, next year or over the next few years — donors can recommend grants from the account to the charities they want to support.
DAFs typically have the resources and expertise for evaluating, receiving, processing and liquidating complex non-cash gifts that most individual charities are not equipped to handle.
Generally, the most complex asset contributions can be handled and processed by major DAF sponsors within five days.
You don’t have to be an IPO insider for this to matter
The IPO headlines are attention-grabbing, but this strategy applies to anyone holding appreciated stock.
Tech-heavy portfolios, company stock held through an employee purchase plan or brokerage account, equity compensation that is vested over several years — any of these can create the same dynamic: Shares that have grown substantially in value, with a capital gains tax bill waiting whenever the assets are sold.
If you’ve been holding off on portfolio rebalancing or trimming a concentrated position because of the tax consequences, donating a portion of those shares to a DAF before selling is worth considering.
The tax rules are straightforward. Shares must have been held for more than one year to qualify for the full fair market value tax deduction.
The deduction for appreciated non-cash assets is generally limited to 30% of adjusted gross income in any given year, with a five-year carryover for any amount above that limit.
And all contributions to a DAF are irrevocable — once contributed, the assets belong to the charitable organization that sponsors the DAF.
The flexibility factor
One thing that surprises many donors is how much flexibility a DAF provides. Donors don’t need to decide where their money goes before they contribute. Separation between the financial decision and the charitable decision removes a lot of pressure.
Major liquidity events tend to be busy and emotionally complicated. A DAF lets donors make the contribution now, while using their contribution to support both short- and long-term charitable giving goals.
If you have appreciated stock — whether from an IPO, years of market growth, equity compensation or a concentrated position you’ve been managing — now is the time to start thinking about how your philanthropic goals can align with your overall wealth management goals.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
