As your Financial Advisor at BayRock Financial, I want to introduce you to an excellent opportunity for maximizing your charitable impact and managing your philanthropic efforts: the Donor-Advised Fund (DAF), offered through our partnership with . This service provides a seamless and tax-efficient way to make a difference while enhancing your financial planning strategy.
A Story of Strategic Giving: From Cash to Donor-Advised Fund
Client Background: John and Mary, a generous couple in the highest marginal tax bracket, love supporting their local church. For years, they’ve been donating $25,000 annually from their checking account, a routine that brings them great joy. However, during a financial review with their advisor at BayRock Financial, they discovered a more efficient way to give.
The Traditional Approach: Each month, John and Mary would set aside a portion of their income to reach their $25,000 annual donation goal. This money came directly from their after-tax cash flow, reducing their disposable income. While they were happy to support their church, they didn’t realize the potential tax implications of their method.
Exploring a Donor-Advised Fund (DAF): During a conversation with their Financial Advisor, they were introduced to the concept of a Donor-Advised Fund (DAF). The advisor explained how they could use appreciated assets, such as stocks, to fund their charitable giving, rather than using cash. John and Mary had a stock portfolio, including shares they bought years ago at $50 each, which had since doubled to $100.
The Tax Benefits of Using Appreciated Stock:
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Avoid Capital Gains Tax: By donating the appreciated stocks directly to the DAF, John and Mary would avoid paying capital gains tax on the $50 increase per share. Had they sold the stocks, they would have faced a 20% capital gains tax, which would have been $2,500 on a $25,000 donation (if all the shares were sold for this purpose). By donating the stocks directly, they avoided this tax entirely.
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Full Market Value Deduction: The couple could claim a charitable deduction for the full market value of the donated stocks, $100 per share. This deduction is significantly more beneficial than the after-tax cash they would otherwise donate. For the $25,000 worth of stock, they could deduct the full amount against their income, potentially reducing their taxable income by $25,000.
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Maximizing Giving Power: By using the DAF, John and Mary could allocate their appreciated assets for charitable giving, allowing them to use their cash flow for other financial goals or needs. This method also freed up more of their income for investments, savings, or personal expenses.
The Outcome: The couple decided to establish a Donor-Advised Fund through BayRock Financial’s partnership with Schwab Charitable. They transferred the appreciated stocks into the DAF, which were then sold without incurring capital gains taxes. The proceeds were used to make their annual donation to the church, but now with added benefits:
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They received a $25,000 tax deduction, reducing their taxable income and thereby lowering their overall tax liability.
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They avoided $2,500 in capital gains taxes.
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They continued to support their church with the same amount but in a much more tax-efficient manner.
Conclusion: John and Mary were thrilled with the results. Not only did they continue their charitable mission, but they also optimized their financial plan, ensuring that their generosity had the maximum impact. The DAF allowed them to give more strategically, preserve their cash flow, and enhance their overall financial well-being. This experience highlighted the value of proactive financial planning and the importance of discussing charitable goals with their advisor.
Key Benefits of a Donor-Advised Fund at BayRock Financial
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Immediate Tax Advantages: When you contribute to a Schwab Charitable DAF, you receive an immediate tax deduction, allowing you to lower your taxable income in the current year. For cash contributions, you can deduct up to 60% of your adjusted gross income (AGI), and for appreciated securities, up to 30% of AGI. This strategy is particularly effective if you have highly appreciated assets, as you can avoid paying capital gains taxes.
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Potential for Investment Growth: Once your assets are in the DAF, they can be invested in a range of investment pools managed by Schwab. This allows your charitable contributions to potentially grow tax-free, increasing the amount available for your chosen causes.
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Flexibility in Giving: You have the freedom to recommend grants to your favorite charities at any time, without any minimum or maximum annual distribution requirements. This flexibility allows you to support causes as your passions and priorities evolve.
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Convenience and Simplification: BayRock Financial and Schwab Charitable handle all the administrative work, including record-keeping and compliance, making the process of giving much easier than managing a private foundation. This convenience means you can focus on your philanthropic goals without getting bogged down by logistics.
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Option for Anonymity: If you prefer, you can choose to make your donations anonymously. This can be an attractive option if you wish to keep your charitable giving private.
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Cost-Effective Solution: There are no setup or annual fees for opening a DAF, apart from the investment management fees associated with your chosen investment options. This makes it a cost-effective way to manage your charitable giving.
How a Donor-Advised Fund Can Benefit Your Financial Plan
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Tax Efficiency: By donating appreciated assets directly to the DAF, you can maximize your charitable deduction and avoid capital gains taxes. This means more of your assets can go towards supporting the causes you care about.
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Legacy Planning: You can use the DAF as part of your legacy planning. You have the option to name successors who can continue recommending grants, or you can designate specific charities to receive grants after your lifetime, ensuring your philanthropic vision lives on.
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Streamlined Management: With consolidated tax reporting and easy grant-making processes, managing your charitable giving becomes straightforward and efficient. We will assist you in tracking and managing your donations, simplifying your financial life.
Steps to Get Started with a Donor-Advised Fund
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Open Your Account: We can help you set up your DAF through Schwab Charitable. The process is straightforward, and we’ll guide you every step of the way.
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Contribute Your Assets: You can contribute cash, securities, or other assets to your DAF. Remember, these contributions are irrevocable and are intended for charitable purposes.
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Choose Your Investments: Select from various investment options to potentially grow your contributions, increasing the funds available for future grants.
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Recommend Grants: At any time, you can recommend grants to qualified public charities, allowing you to support the causes that are most important to you.
Our goal at BayRock Financial is to help you achieve your philanthropic objectives in the most effective and impactful way. By incorporating a Donor-Advised Fund into your financial plan, you can enjoy the benefits of tax-efficient giving, flexible grant-making, and simplified administration.
A Schwab Charitable™ donor-advised fund account is a simple, tax-smart investment solution for charitable giving.
You just set up an account with Schwab Charitable and contribute cash, securities, or appreciated assets. You’ll be eligible for a current-year tax deduction and can be more strategic about your giving decisions.
A tax-smart way to manage giving.
A tax-smart way to manage giving.
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Contribute cash, appreciated assets, or investments that have been held for more than a year without paying capital gains taxes.
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Contribute to your account and grant to charity at any time, not just at year-end.
Make giving simple and efficient.
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Recommend grants quickly and easily through the Schwab Charitable Client Center or .1
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We verify the charities and send them each a check along with a personalized grant letter featuring your own custom letterhead.
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Keep track of your contributions and grants online, plus access a simple and personalized annual report at tax time ().
How a donor-advised fund works.
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1: Contribute
Open an account and contribute cash, appreciated assets, or investments.
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2: Invest
Invest in one or more of our investment pools or recommend an investment advisor to manage your account.
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3: Grant
Recommend grants to qualified U.S. public charities of your choice at any time.
