With the recent continuation of the markets’ irrational exuberance, many of us have some horse-choking gains in our non-IRA accounts so how can we make the best of a taxing situation? First, let’s acknowledge that paying capital gains, even at the highest rate of 20¢ on a dollar, means we’re still walking away with 80¢ we didn’t have before so, to be perfectly honest, we are moaning just a bit about being fortunate. That notwithstanding, is there a way we can avoid that 20¢ or perhaps even spin a little gold from the straw we’re being given? Of course there is (otherwise I’d be writing about something else this week) – donating some of those appreciated holdings.
As we touched on a few months back, there are a several ways to make donations – you can write a check or give a group cash, you can donate the appreciated position directly to the charity (which assumes they are set up to receive something like this), or you can donate the position into a Donor Advised Funds (DAFs). Think of DAFs as a soup tureen you can pour a whole bunch of appreciated stock(s) into all at once, taking the charitable deduction for that year, then gradually spoon out just what you want to donate over the subsequent years. Furthermore, while you are deciding what you’d like to support, your donation continues to appreciate (or depreciate – this is an investment after all), you can rebalance the position into other investments (without the capital gains), and if you get hit by a bus, you can have a charities designated as beneficiaries, which is a lot less complicated than having them as the beneficiaries in your will or on your account.
Let’s walk through an example. Say you normally give $100/mos to your local spiritual organization, which means that over 4 years you would have given $4,800. Now, perhaps you have a stock or mutual fund you inherited from your granddad that’s been sitting in an account, ignored for most of your adult life and that account has accumulated boatloads of capital gains over the years (meaning, to touch it is to tax it). You could open a Donor Advised Fund and donate a portion ($4,800) of that account to the DAF. For the year you move grandpa’s stock into the account, you can add a charitable contribution to your itemized deduction, which will, with a little planning, make your deductions more valuable than the standard deduction. Then, over the following years, you can donate $1,200/yr. to the organization of your choice. Four years later, you can repeat the process. Now you are getting a little tax benefit for something you were already thinking of doing, not to mention perhaps cleaning up your portfolio a little.
What if you’re not sure that you want to do something like this now, while you are young(ish) and may spend all your money to die broke? You can make a DAF part of your estate planning by naming the Donor-Advised Fund you set up (but didn’t fund) as a beneficiary of your will or your retirement account. That way, if you get hit by that bus before you’ve spent all your money (responsibly or irresponsibly – this is a no judgement zone), the remainder will flow into the DAF and the dollars can be distributed based on your intentions. You can even dictate a schedule for the DAF to use the dollars.
Where might you find these little charitable curiosities? Many of the bigger investment firms now have them (Fidelity, Schwab, Vanguard) or you could work with a local community foundation to help you establish one. One advantage of the local community route is that they often fund smaller organizations that you won’t see (or don’t qualify) for the bigger firm’s lists. Some DAFs provide little checkbooks so you can write out a donation if you’re at an event and many have a fairly sophisticated electronic donating system where you use a few dropdown boxes then click a few buttons and you’re finished in time to grab that mojito before dinner.
So, if you are charitably inclined, consider checking out a Donor Advised Fund for your giving strategy. Using one might just save you a few tax dollars and almost certainly will make donating anything other than the $20 in your pocket easier.