When working with high net worth families, tax efficient (and time efficient) charitable giving presents an often-overlooked planning opportunity. Quite often, clients make any/all charitable contributions via cash, check or credit card. There are much more tax-advantaged ways to donate, and these techniques can be even more valuable given the recent changes to the tax code. For most families who typically donate $5,000 a year or more to charity, utilizing a Donor Advised Fund may provide an easy and cost-efficient method.

Understanding the Tax Benefits

Putting the new tax rules aside for the moment, $5,000 of charitable contributions yields a significant federal tax deduction and savings of $1,850 (assuming a 37% marginal tax rate * $5,000 in donations). Did you know that the same $5,000 in contributions can be far more valuable?

By gifting long-term appreciated securities, in lieu of cash, you can significantly increase the tax benefit of your charitable contributions. Gifting low basis securities also removes the capital gains tax that you would otherwise pay when you sold those securities. Sticking with the above example, if you gift $5,000 in securities with a basis of $2,000, you would no longer be responsible for $720 in long term capital gains tax (assuming 24% federal tax rate). When combined with the $1,850 tax savings from above, your $5,000 donation of appreciated securities produces an all-in tax savings of $2,570. The savings can be even higher when accounting for state income tax, depending on your residency. For clients with low-basis stock, this may be a great way to maximize the impact of your charitable giving. If a client wanted to maintain the same position (e.g. owning Apple stock) they could again buy the same amount of stock in cash which would re-establish their basis at the appreciated share price^*.

Using a Donor Advised Fund

While the tax benefits of gifting appreciated securities are clear and significant, there are some operational challenges to consider. Certain charities are unable to accept gifts of appreciated securities. In addition, gifting to several charities (or charitable events) throughout the year can require significant time and effort to find and transfer appreciated securities in the exact amounts. A donor advised fund (DAF) solves these inefficiencies by allowing you to “bunch” your security transfers at once into a separate charitable account. Typically, you would fund your total expected charitable contributions for a given period of time (1 year or multiple years) in advance. You would receive a tax deduction in the tax year you make the contribution. You have now created what is essentially a charitable “wallet,” allowing you to recommend grants to any recognized charitable organization.

Funds do not need to be fully dispersed in any given year; in fact, many clients upfront gift a few years’ worth of giving in one year. This allows families to be more strategic in their annual tax planning especially in light of the recent tax code changes: you can increase your deductions in high income years and/or increase your itemized deductions in any one year to more effectively leverage the increased standard deduction (now set at $29,200 for a married couple filing jointly for the 2024 tax year).

Conclusion

Effective planning creates a significant opportunity for high net worth families to maximize the impact of their charitable giving. By gifting appreciated securities, and leveraging a Donor Advised Fund to do so, can be a powerful strategy in the:

• Ability to maximize the tax benefits of giving – itemized deduction and capital gains exclusion
• Simplicity of giving – an efficient, online process
• Increased flexibility to enhance your overall tax planning – bunching of gifts in high-income years and to manage around the increased standard deduction

*This is a hypothetical example for illustration purposes only.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Klingman & Associates and not necessarily those of Raymond James.

Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.