TRUST & ESTATE PERSPECTIVES

The ins and outs of making a contribution to a donor advised fund

Leveraging your concentrated stock position as a contribution to boost year-end giving.

There comes a time when many successful business people turn their attention to their legacy and their desire to give to charitable causes that matter most to them. Perhaps you've decided to leave charitable giving to your estate to handle once you've passed away, or maybe you'd like to play a more active role and pursue charitable giving now. If you're philanthropically inclined and wish to donate to a cause during your lifetime, you may consider a donor advised fund (DAF). A DAF provides a charitable gift vehicle, sponsored by public charities, as a means of making tax-deductible donations. After donating to the fund, you can request that donations from the account go to IRS qualified charities.

While a DAF may sound appealing, it's imperative to determine whether it's the best option for you. And working in partnership with Trust experts here at SVB Private, we can help determine the right fit for you. Gerald Baker, our Chief Fiduciary Officer, provides this example; "A foundation provides you with a higher degree of control and it often comes with more expenses. Unlike a foundation, whose documents are in the public domain, a DAF offers donors a higher degree of privacy. If privacy is important to you, here's how you can pursue charitable giving that is aligned with the causes you wish to support."

Making a lasting impact with your charitable giving

If you're the founder of a company, or if you've accumulated a disproportionate amount of stock from your employer, a DAF may offer a particularly appealing way to make your charitable wishes come true. If you decide to donate a concentrated stock position — a single stock that represents a large portion of your holdings — you won't incur any capital gains. Instead, you will receive a tax deduction equal to the fair market value of the contribution to the fund.

In addition to receiving a tax benefit for the fair market value of the concentrated stock contribution, it's possible for the fund's manager to liquidate the position and put the proceeds of your contribution into a diversified portfolio within the fund. This will mitigate the risk of holding funds designated for charity in a single investment, and help maximize the impact your charitable contributions have on the causes you support.

However, keep in mind that if you intend to donate to charity via a DAF, you should donate the shares not the proceeds of sale that take place outside of the DAF to receive the full tax benefits and avoid the payment of capital gains.

Planning is a must

For many successful and charitable individuals, the tax benefits are enough to swing the balance in favor of donating via a DAF. Nonetheless, before you make the decision to donate to a foundation or a DAF, make sure you dedicate some time to develop your estate plan. Charitable giving doesn't take place in a vacuum; before you can give away what you've worked so hard to accumulate, take your entire financial picture into account — not just what you've decided to give away.

Via the financial planning process, you can create a vision for your entire estate, including how you plan to support your lifestyle as well as the amounts you wish to donate to charity, today and in the future. While some approaches to charitable giving provide little visibility as to how the donations make a difference, with this degree of planning, you can keep close tabs on how your giving impacts the causes that matter most to you.

Given the tax benefits associated with a DAF, part of the planning process involves identifying the holdings with the lowest cost basis, and therefore, the highest fair market value and resulting tax benefits. Consequently, if you're the founder of a company that has gone public, you are an ideal candidate to make your charitable wishes come to life with a DAF. While you may stay involved in the company, and receive more shares post-IPO, the appreciated stock you currently hold is ideal for contribution to a DAF as it maximizes both charitable giving and your tax deductions. Nonetheless, you can start making a difference today as there is no minimum amount required to participate in a DAF.

In-depth planning also prepares you for the feelings you might encounter when you relinquish control of concentrated stock, as there may be an emotional attachment. Furthermore, by preparing a detailed financial plan, you can evaluate the pros and cons of donating your investments and become even more comfortable and committed to the idea of sharing your wealth with those who need a helping hand.

Sandy Galuppo is a Managing Director at SVB Private, assisting high net worth individuals and families manage their wealth through personalized financial planning services. He also helps executives of public corporations, partners at professional service firms and venture/private equity partners integrate the complexities of their executive and partner compensation into their overall financial plan.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank Financial Group. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein