Why You Might Consider a Donor-Advised Fund Prior to an M&A Transaction

For many, in the year of closing of an M&A transaction, a considerable amount of taxable income could be generated from both vested and unvested options, as well as restricted share grants. This in turn could result in a significantly higher than usual tax bill for 2016. Those who are charitably inclined may want to consider accelerating their future charitable gifts into this year when they are in a high tax bracket by “pre-funding” a donor-advised fund, also known as a charitable gift fund.

A donor-advised fund is a charitable instrument that allows a donor to contribute cash, securities, or other assets into an account and distribute those assets over time to a charitable organization of their choice. Upon donation, the donor is eligible to receive an immediate tax deduction (subject to limits) in the current tax year. The transaction is irrevocable, meaning that you surrender any ownership rights to assets moved into the account; however, you maintain the ability to choose the amounts and recipients of later charitable distributions. In addition, once in the account, the contribution can be invested and grown tax-free.

While an account can be funded with cash or securities, a contribution of long-term appreciated securities could help maximize tax savings. Not only would you get a full fair market value tax deduction on the amount gifted to the fund, but you would also avoid any capital gains tax that would have been assessed upon the sale of the asset.

Furthermore, donor-advised funds are not subject to estate taxes; and, if you are subject to the alternative minimum tax (AMT), the donation can reduce your AMT liability.

Case Study

A client worked for a company that for many years had operated as a private company and recently underwent an IPO. At the time of the IPO, the client was able to sell a portion of his shares, which generated a large taxable event for the client. Recognizing that this was an abnormally high income tax year, and knowing that the client was charitably inclined, a Colony Group counselor recommended opening a donor-advised fund at the client’s current custodian and gifting the most highly appreciated stock from the client’s taxable investment account. The counselor also recognized an opportunity to diversify the client’s portfolio, as the client was heavily concentrated in their company stock. The client not only decreased his current-year tax bill using the donor-advised fund strategy, satisfying current and future charitable needs, but also reduced overall portfolio risk and improved his financial outlook.

The donor-advised fund is an effective tool to take advantage of a current-year tax deduction while delaying the ultimate decision as to where charitable funds will go. Your Colony Group counselor is available to discuss this option, along with other tax strategies that may be appropriate for you to consider in 2016.