Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

Maximizing Tax Benefits and Community Impact: The Power of Donor Advised Funds

Mike Metzger, Founder | CERTIFIED FINANCIAL PLANNER™

Salt Lake City, Utah

Donor Advised Funds (DAFs) have gained significant popularity in recent years, offering individuals a unique opportunity to optimize their charitable giving while minimizing their tax burden. In this blog, we will explore how DAFs can help you avoid paying capital gains tax on highly appreciated assets, reduce your overall taxation, and make a positive impact on your community through charitable contributions. This financial planning strategy for business owners, and highly compensated employees, can be a game-changer. We will also make sure to discuss important considerations to keep in mind before adopting a DAF.

1. Avoiding Capital Gains Tax on Highly Appreciated Assets:One of the key advantages of utilizing a DAF is the ability to avoid paying capital gains tax on highly appreciated assets. When you donate such assets directly to a DAF, you can eliminate the tax liability that would have arisen had you sold the asset and realized the capital gain. This strategy allows you to maximize the value of your donation while simultaneously supporting causes close to your heart.
2. Reducing Taxation and Doing Community Good:By contributing to a DAF, you can significantly reduce your overall taxation. When you donate to a DAF, you become eligible for an immediate tax deduction for the full fair market value of the donated assets. This deduction can be spread over multiple years, allowing you to optimize your tax planning and potentially reduce your tax liability in each year. By leveraging this tax benefit, you can allocate more funds towards charitable causes, making a substantial positive impact on your community.
3. Keeping the Basis on Donated Assets and Stripping Out Capital Gains:Another noteworthy advantage of DAFs is the ability to retain the basis on the donated asset while stripping out the capital gain. This means that if you were to sell the asset yourself, you would have to pay taxes on the capital gain. However, by donating the asset to a DAF, you can transfer the appreciated value to the fund while keeping the original cost basis intact. This can be particularly advantageous if you have assets with a low basis but high appreciation, as it allows you to avoid paying taxes on the gain while still benefiting from the full value of the donation.
4. Important Considerations before Adopting a DAF:While DAFs offer numerous benefits, it is crucial to consider a few key factors before adopting one:

a. Eligibility and Minimum Contribution: Different DAF providers have varying eligibility criteria and minimum contribution requirements. Ensure that you meet the eligibility criteria and are comfortable with the minimum contribution amount before choosing a DAF provider.

b. Investment Options and Fees: DAFs typically offer investment options to grow your charitable funds over time. It is important to understand the investment options available and any associated fees or expenses. Consider choosing a DAF provider that aligns with your investment goals and offers competitive fee structures.

c. Grantmaking Flexibility: Evaluate the grantmaking flexibility offered by the DAF provider. Some providers may have restrictions on the types of charitable organizations you can support or impose minimum grant amounts. Ensure that the DAF aligns with your philanthropic objectives and allows you to support the causes that matter most to you.

d. Administrative Support: Consider the level of administrative support provided by the DAF provider. Look for a provider that offers user-friendly online platforms, efficient grant processing, and responsive customer service to enhance your giving experience.

Donor Advised Funds present a powerful opportunity to optimize your charitable giving, reduce your tax burden, and make a positive impact on your community. By leveraging the benefits of DAFs, such as avoiding capital gains tax on highly appreciated assets and retaining the basis on donated assets, you can maximize the value of your donations. However, it is essential to carefully evaluate important considerations before adopting a DAF to ensure it aligns with your financial goals and philanthropic aspirations. With proper planning and thoughtful decision-making, DAFs can be a valuable tool in your charitable giving strategy.

 

 

Disclosures:

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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