Unlocking Philanthropy: The Strategic Advantages of Donating Appreciated Assets

Philanthropy is a powerful tool for positive change, and donor-advised funds (DAFs) have become increasingly popular vehicles for strategic giving. According to data from the National Philanthropic Trust, $52.16 billion in charitable grants came from DAFs in 2022, an increase of 9% from 2021. Moreover, DAFs held over $220 billion in assets in 2022, and received contributions of over $85 billion on the year. There were over 1.9 million DAF accounts in the report, with an average balance of $117,466. Suffice it to say, donor-advised funds have become a critical component of charitable giving in America.

Traditionally, cash contributions have been the primary means of funding DAFs, and for good reason – when you donate cash, you’re generally eligible for a deduction up to 60% of your adjusted gross income. That is a major tax benefit. However, a savvy philanthropist understands that there are unique advantages of using long-term appreciated assets (assets held for longer than 1 year and 1 day) to fund a DAF for a more impactful and tax-efficient giving strategy. In this blog, we’ll explore the benefits of using appreciated assets to fund a donor-advised fund and how it can amplify the impact of your charitable giving.

1: Tax Efficiency: Maximizing Contributions and Minimizing Liabilities

One of the most significant advantages of contributing appreciated assets to a donor-advised fund is the potential for substantial tax benefits. When you donate appreciated securities, such as stocks or mutual funds, that have increased in value, you may be eligible for a charitable deduction based on the current market value of the assets, up to 30% of your adjusted gross income (you can carry forward any excess deductions for up to 5 years).

Now, you may be thinking “wait a second, that’s only half of the deduction for cash. Why would I do that?” Well, by contributing appreciated assets, you can potentially eliminate capital gains taxes that would be incurred if you sold the assets independently. This means that not only do you as the donor benefit, but there are also potentially more assets available for the DAF to use in the future. For example, let’s say you would like to donate $150,000 to start a DAF. If you have a long-term investment with a current market value of $150,000 that you plan to use for the donation and an original cost of $75,000, you have two options: 1) you can sell the investment and use the cash proceeds to fund the donation; 2) you can gift the investment to the DAF. Let’s explore those further:

If you are in the 20% capital gains bracket, and also subject to the Medicare surtax of 3.8%, the sale would look as follows:

• $150,000 proceeds from sale at current market value
• – $17,850 taxes on the $75,000 gain
• = $132,150 cash available to donate

In this situation, in order to accomplish your goal of funding your charitable donation with $150,000, you will have to make up the $17,850 difference from other assets. Now let’s look at the option of donating the appreciated asset to the DAF instead of selling it:

If you donate the investment to the DAF, the donation would look as follows:

• $150,000 current market value donated
• No tax liability as the investment is not sold
• = $150,000 total donation

In this scenario, you are able to avoid capital gains taxes and accomplish your goal of funding the DAF with $150,000 without tapping into other assets. For philanthropically minded individuals who want to maximize their long-term charitable giving, donating appreciated assets is a great way to ensure the full amount of their desired donation is actually received by the DAF, and that they can retain additional assets to fund their other goals or future giving.

2. Diversification of Giving: Beyond Cash Limitations

While cash donations are valuable, relying solely on cash limits your ability to diversify your giving portfolio. Appreciated assets, such as stocks, bonds, or real estate, provide the opportunity to broaden the types of assets you contribute to your donor-advised fund. This diversification not only aligns with a sophisticated investment approach, but also allows you to contribute assets that may have a more substantial impact on the fund’s growth. You may own assets that, while valuable, are not easily converted into cash. Assets such as real estate, private company stock, or other non-publicly traded assets fall into this category. By donating these appreciated, illiquid assets to a donor-advised fund, you can unlock their value for charitable purposes without the complexities of selling or liquidating these assets independently.

In the realm of philanthropy, leveraging appreciated assets to fund a donor-advised fund offers a strategic and impactful approach to charitable giving. The combination of tax efficiency, compounding impact, and the ability to diversify your giving portfolio makes this method a compelling option for those seeking to maximize the positive outcomes of their generosity.

As you embark on your philanthropic journey, consider the potential of appreciated assets to not only benefit the causes you care about, but also to optimize your financial and tax planning for a more sustainable and impactful giving strategy. We are here to help you create a philanthropic plan that helps you achieve your goals in the most efficient and effective way possible.

Sources:

“The 2023 Daf Report.” NPTrust, 27 Nov. 2023, www.nptrust.org/reports/daf-report/.