Case Study: Donor Advised Fund
January 2023
To help illustrate the use of a Donor Advised Fund (DAF) for tax advantaged giving to charity we have put together the following hypothetical case study:
Mike and Susan Smith (Age 52) are happily married and feel highly confident with their current track to retirement. Mike is a successful business owner and Susan has been an annual top performer at her engineering firm. Both are passionate about supporting their church and several local charities and have voiced these goals to their planning team. Combined, Mike and Susan make $585,000 and are in a 35% marginal tax bracket. Mike and Susan have been dedicated savers to both their retirement plans and taxable investments and continue to fund both on an annual basis. Mike and Susan max out both of their 401k’s ($30,000 each) and fund $50,000 into their joint taxable account annually. Their joint taxable investment account has appreciated nicely over the last 15 years. Susan has even made comments that she is concerned about the tax liability within this account when they start to consume these assets.
Mike and Susan’s planning team have introduced a Donor Advised Fund (DAF) as a planning concept that aligns with their charitable initiatives and overall financial planning goals. The establishment of a Donor Advised Fund will allow Mike and Susan to contribute the low-cost basis stocks and investment positions within their joint taxable investment account. This contribution serves two purposes. It will provide Mike and Susan a charitable contribution during the 2023 tax year. Additionally, the charitable contribution of low-cost basis positions held more than one year allows Mike and Susan to avoid paying capital gains that would otherwise be due if they were to sell the positions. Given Mike and Susan’s 20% capital gains tax rate, also subject to a 3.8% NIIT plus applicable state tax rate, this is a significant tax savings during the 2023 tax year. This is also a portfolio management tool for Mike and Susan’s investment team as they can evaluate positions that may already be marked to sell or rebalance as part of their investment strategy.
The Donor Advised Fund also offers additional benefits for Mike and Susan beyond the tax advantages. You can receive the tax benefit for 2023, but you do not have to give the money to charity. This provides the opportunity to “bunch” charitable giving into a single year, but Mike and Susan are not committed to give it away during 2023. Additionally, their charitable giving receipts for the year are aggregated on a single statement. A Donor Advised Fund can also allow you to potentially create a “bucket” for charitable giving in retirement but receive the tax benefit during your working years.
The combined tax and philanthropic benefits make a Donor Advised Fund a potentially valuable planning tool as part of Mike and Susan’s overall financial plan.
Modeled below is a potential Donor Advised Fund contribution for Mike and Susan:
