Everything you need to know about QSBS

Introducing Donor Advised Funds

3 MIN READ08 FEB 2023

Compound can now help you set up and manage a donor-advised fund.

A donor-advised fund (DAF) can be an effective way to set aside assets for future philanthropic giving while generating an immediate tax deduction.

Here is as an example of a strong use case for a donor-advised fund:

  • In the year following your company’s IPO, you exercise options, sell shares, and otherwise create a sizable taxable income for the year.
  • Given your liquidity event, you’ve decided you want to fund some charitable contributions.
  • You create a donor-advised fund and transfer long-term, highly appreciated stock to it (this allows you to reduce some of this year’s taxable income).
  • The donor-advised fund might then sell the stock and reinvest into a diversified portfolio, or it could hold the transferred position.
  • When you are ready to make a gift to a specific charity over the next few years, you simply instruct the donor-advised fund to do so.
  • The donor-advised fund sells shares if needed, and it sends cash to the recipient charity.

A donor-advised fund is an investment account, created for the sole purpose of supporting charitable organizations. A DAF allows you to pledge assets — like cash, real estate, crypto, or appreciated stock — that you can donate to chosen charities over time. When assets are pledged, the donor receives a tax deduction for the pledged amount (which can be especially valuable in a high-income year, like after a startup liquidity event).

By front-loading many years of charitable giving, you can offset years of unusually high income, thereby avoiding a high marginal tax rate in that year. The large donation to the donor-advised fund qualifies as an itemized deduction against your gross income. Since your gross income is so high from the liquidity event, you may be in the highest marginal bracket or at least higher than your typical bracket. Thus, getting the deduction against the high marginal rate is particularly valuable in the year you have a spike in taxable income.

Your DAF becomes a vehicle to manage any future philanthropic gifts you want to make. Pledged assets are invested so your charitable account grows in value, and assets can be donated at any time so your DAF can be a lifelong tool for charitable giving.

As a Compound client, we can help you set up and manage your DAF. We’ll help you decide how much to pledge, understand tax implications, fund the account, and direct how your assets are invested. And when it’s time to make a donation, your financial advisor will help you execute.

And because your DAF is tracked on the Compound dashboard and integrated with the rest of Compound, we will track your DAF alongside your other investment accounts. This means your financial and tax advisors are up-to-date, and you can monitor your philanthropy together with the rest of your financial life.

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