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Jacob Turner

WHY ATHLETES & HIGH-GROWTH ENTREPRENEURS SHOULD CARE ABOUT DONOR ADVISED FUNDS

A Donor Advised Fund (DAF) is a great tool to consider for those with extraordinary income. Today we will break down what a Donor Advised Fund is, who should consider a Donor Advised Fund, and what tax benefits you will receive.


What is a Donor Advised Fund?

You may have heard this term before, but wondered what it is. It is an investment account used for giving. When funding this type of investment account, you get special tax treatment on your assets today and in the future. You can fund a Donor Advised Fund with cash or investments. You will be able to shift assets from your personal name into your charitable bucket when funding a Donor Advised Fund. When you move your assets into a Donor Advised Fund, the IRS treats these assets as if you have given them away in that calendar year. Donor Advised Fund assets must be given to a qualified 501C(3). A 501C(3) is a code the IRS uses to designate an organization as a charity. You cannot pull these assets back and use them for your benefit. The benefit is that the IRS allows you to get special tax treatment on the assets you donate, the growth of your assets in the Donor Advised Fund, and a tax deduction today.


Example: Bill decides to move $1,000,000 into his DAF from his brokerage account. Bill does this because he wants to get multiple tax benefits in the calendar year that he is funding his DAF. Once Bill moves his assets to the DAF, the assets no longer belong to him personally but to his DAF. Bill can give these assets to any qualified 501C(3). Bill is utilizing this because of the special tax treatment this account allows and to have control over his giving in case he wants to adjust the charities he supports in the future.


Recap – What is a DAF fund?

  • An investment account that you can utilize for giving.

  • A way to get special tax treatment on your assets today.

  • A way to get special tax treatment on your assets in the future.

  • Who should consider using a Donor Advised Fund?

  • The two common characteristics of people utilizing a DAF are those experiencing extraordinary income or looking to diversify out of a concentrated holding..

  • The key to determining the use of a DAF is timing.


Example 1:

Bill has Apple stock that he bought back on December 1st, 1991, for .60 cents per share. Bill has held his Apple stock until today when the stock is worth 151.60 cents. One of the primary reasons that Bill doesn’t want to sell his Apple stock is because he will incur capital gains taxes on his sale. These taxes are calculated by looking at the difference between what Bill paid for the stock and what it is worth today. In this example, he will pay 151 dollars in capital gains taxes per share. Bill has decided that he no longer wants to hold his Apple stock and is trying to figure out how to minimize his capital gains taxes. If Bill moves his Apple stock from his brokerage account into a DAF, he will pay zero dollars in taxes on his Apple stock. Yes, you heard that right, no tax liability.


Example 2:

Bob is a professional athlete and has one year remaining on his contract. He recognizes that this might be his last contract and may retire after this year. He wants to know if there is a way to reduce his tax liability in the last year of his contract. By donating cash or appreciated securities to a DAF, Bob can get a dollar-for-dollar deduction on his tax return. Doing this in the last year of Bob’s career may make sense because he will be in the 37% tax bracket. If he retires, his tax rate may be reduced significantly. Let’s assume his tax bracket post-playing career is the 12% tax bracket. In this example, the benefit of using a DAF today versus after his playing career is a 308% increase in value. When you are in the highest tax bracket you get the most bang for your buck.




Recap – Who should consider a Donor Advised Fund?

  • If you are trying to diversify assets on your balance sheet and get special tax treatment.

  • If you are experiencing a year or period of extraordinary income and are looking to reduce taxes.

What are the Tax Benefits of a Donor Advised Fund?

When considering a donor-advised fund there are 3 primary tax benefits. The first benefit is that you get an immediate tax deduction on your taxes. The IRS will treat any contribution as a charitable contribution for tax purposes. The second benefit is that you can mitigate capital gains taxes on assets you contribute to a DAF to zero. In the example outlined, you can see that any appreciated asset you contribute will avoid capital gains tax. The last benefit is that the assets in your DAF can be invested and grow tax-free.

Example: Joe is in the process of selling his company while mitigating his taxes and preserving his legacy. Joe is going to sell his company for $20,000,000 this year with the deal projected to close in August. This strategy will need to be implemented in the calendar year that the transaction happens. In a review of Joe’s balance sheet, he has several positions in his investment portfolio that have appreciated. Joe has the opportunity to gift shares of these appreciated securities to a DAF. When Joe does this, he will eliminate the capital gains taxes on these positions at the time of the gift. When the assets hit his DAF, he will receive a tax deduction of that amount. Remember, Joe now controls these funds and can give them away to any qualified 501c(3) over any period. Lastly, he may now invest these funds and they will grow tax-free. This is appealing to Joe, as he wants to create a legacy of giving over the course of his life.

Tax Benefits Recap:

  • You can receive an immediate tax deduction on your tax return.

  • You can mitigate capital gains taxes to zero.

  • The assets in your Donor Advised Fund will grow tax-free



If you are a pro athlete or entrepreneur who is interested in learning more about how a Donor Advised Fund might fit into your financial plan, schedule a call and talk with a Moment founder.


Get in Touch With An Advisor




*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.

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2nd Floor

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info@momentprivatewealth.com

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