Concentrated Positions and Donor-Advised Funds
Presented by Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:
Holders of concentrated stock positions have several options for mitigating the risk associated with owning these shares. Those who are charitably inclined may view a donor-advised fund as a particularly attractive solution because of its ease, convenience, and overall benefits.
What is a donor-advised fund?
A donor-advised fund, or DAF, is an account held through a sponsoring public charity for accepting charitable gifts. Once a gift has been made, the donor becomes a grant advisor to the DAF. As a grant advisor, he or she can make nonbinding recommendations that the sponsoring charity direct grants from the DAF to other public charities.
Gifts to a DAF may qualify for a charitable income tax deduction that equals the fair market value of the gifted cash or property in the year in which the gifts are made. The total deductibility of gifts in any given year is subject to the same limitations as gifts made outright to a public charity—currently, 60 percent of the donor’s adjusted gross income (AGI) for cash gifts and 30 percent of AGI for long-term capital gain property. If the full deduction cannot be taken in the year of the gift because of AGI limitations, the donor may carry forward the unused deduction for five years.
Benefits of funding a Donor Advised Fund with concentrated stock
Funding a DAF with appreciated concentrated stock can provide the following benefits:
- On the date of contribution, the donor receives an income tax deduction equal to the shares’ fair market value.
- Once contributed, the shares can be sold without incurring capital gains tax.
- The donor has a pool of charitable funds that can be directed to support various charitable organizations.
- DAFs are typically easier and less expensive to establish and maintain than other concentrated stock strategies.
- The donor may have the funds professionally managed by his or her financial advisor.
- The donor can designate successor grant advisors who can continue recommending grants to the DAF after his or her passing.
Mr. Smith owns a large, highly appreciated position in ABC Corp. He typically makes annual gifts to various charities and would like to create a DAF funded with $100,000 of ABC stock that has a cost basis of $20,000.
Upon funding the DAF, Mr. Smith can receive a $100,000 charitable income tax deduction. The shares will then be sold—without incurring capital gains tax—and allocated into a diverse portfolio by Mr. Smith’s financial advisor. Rather than write personal checks to various charities that he typically supports, Mr. Smith can now make grant recommendations to the DAF in support of the same charities.
Read more in our case study on donor advised funds.
For owners of concentrated positions who have charitable intent, a DAF can be an excellent way to sell appreciated shares and help fund a charitable legacy in a more tax-efficient manner.
*This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. There can be no assurance of positive performance from the portfolio.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at email@example.com.
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