While accumulating investments outside of retirement savings, investors may find their early investment opportunities have appreciated nicely over time.

For example, those few shares of Starbucks bought with a special bonus are now worth more than $10,000.  There is no doubt this is the goal of accumulation:  invest, grow, repeat.  Now, as hard work has resulted in a more predictable earnings pattern, maybe that $10,000 worth of stock presents an opportunity to give a meaningful donation to a charity (or two) supporting a mission important to you.  By now you realize that growing asset values are certainly meaningful to building net worth, but selling these appreciated assets can bring a large tax bill in the form of capital gains tax.  Instead of selling the shares and paying the capital gains tax, one way to give a larger donation and eliminate your capital gains tax on the shares is through establishing a donor advised fund.    

Donor advised funds are increasingly popular as a vehicle for making tax-deductible charitable contributions. They can be thought of as an uncomplicated and inexpensive alternative to forming a private foundation.  A donor advised fund (DAF) is an investment account funded for the purpose of making charitable contributions. Minimum initial contributions start around $5,000.

Charitable individuals simply open and fund an account as the “donor” with a sponsoring organization, and then advise the sponsor where to send their donations.  These donations (”grants”) can be made to any number of qualified charities in various amounts even as low as $50.  You as the donor receive the charitable deduction in the same year of funding the account, but you can direct charitable donations from the DAF at a later date.

A few additional features of donor advised funds include:

• A DAF account may be funded in several ways, including: cash, appreciated stock, real estate, and even appreciated art.
• Assets placed in a DAF are invested by the sponsoring organization and grow tax-free.  The DAF can grow indefinitely as responsibility for advising the fund can pass to a successor donor after the initial donor’s death.
• Alternatively, the balance of the account can go to a specific charity or charities upon the donor’s death.
• DAFs offer privacy to the donor, as grants can be made anonymously on their behalf

Four examples of sponsoring organizations are:

• Fidelity Charitable Gift Fund (a “Giving Account”)
• Schwab Charitable Fund
• The Chicago Community Trust
• Jewish United Fund of Metropolitan Chicago

If you think a donor advised fund might be right to you, speak with your financial advisor to learn more.