Donor Advised Fund - Tax Efficiency Example

Tax Efficiency Example

The following example is taken from Vanguard’s marketing material for their plan:

Suppose you have 1,000 shares of stock that you purchased 15 years ago (thus, you’re in long term capital gains territory). Assume that you purchased the stock for $10 per share and it is now worth $100 per share. Now, let’s compare the cost to the donor of making a contribution of $100,000 to a charity of your choice. We assume a 35% income tax rate and 15% long term capital gains tax rate.

Option 1: Contribute cash from sale of securities

• Immediate cost of donation: $100,000
• Capital gains tax incurred: $13,500 (15% times ($100k minus $10k))
• Income tax saved: ($35,000) (35% times $100k)

Net cost to donor: $78,500

Option 2: Contribute appreciated securities

• Immediate cost of donation: $100,000
• Capital gains tax incurred: NA (15% times $100k minus $10k)
• Income tax saved: ($35,000) (35% times $100k)

Net cost to donor: $65,000 NOTE: The donor could contribute the stocks directly to the charity of his/her choice, or to a donor-advised fund. The tax efficiency to the donor is the same either way.

Thus, you can effectively contribute $100,000 to the public charity of your choice for $13,500 less in actual donor cost by using the donor advised fund. This example does not acknowledge that the same tax advantage would be obtained if one were to donate the appreciated securities directly to a 501(c)(3) charity, whether it was a donor-advised fund or not, as the charity then sells the assets and the capital gains are avoided.

If the securities increase in value after they have been given to the donor advised fund (but before the grant recommendation is actually made), no additional tax deduction can be claimed by the taxpayer. On the other hand, if the securities decrease in value, the taxpayer's original tax deduction (based on the value of the securities when given to the donor advised fund) continues to be valid.

Even though the tax efficiency is the same, there are some differences between giving directly to the charity and giving via a donor advised fund.

• Some charities are not set up to receive gifts of securities.
• The amount that the donor wants to give to the charity may turn out to be an awkward or small number of shares (for example, it could be administratively complicated to give 5 shares each to 20 charities, but it is easy to give 100 shares to the donor advised fund and then make 20 separate grant recommendations).
• Giving to a donor advised fund allows the donor to take the tax deduction when it is advantageous to him/her. For example a taxpayer can get a tax deduction when he/she gives to a donor advised fund and then take his/her time to decide which charities should be the ultimate beneficiaries.
• Some donor advised funds are able to process gifts to foreign charities. Direct gifts to foreign charities are generally not tax deductible.
• However, there is a cost to using donor advised funds. Most donor advised funds charge an administrative fee (eg 1% per year). This is in addition to any management fees charged by the actual mutual funds that funds are invested in.
• There may be fees charged for every grant, especially if made to a foreign charity.

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