“You Can’t Touch This!” You may remember this iconic lyric from M.C. Hammer and Rick James. The song came out in 1990, and while some trends from that era are best left there, the message still resonates today.
So why bring it up now?
Over the past several years, investors have experienced significant gains in equities, particularly in technology and communications. These gains can look very attractive on paper, but accessing them can come with a cost. Taxes may stand in the way. In many cases, you truly “can’t touch” those gains without creating a tax liability.
One strategy to consider is donating appreciated securities to charity through a Donor-Advised Fund, or DAF.
A DAF is essentially a charitable investment account designed to support the organizations you care about. It is straightforward to use and offers several potential benefits:
1) Contribute appreciated assets
You can fund a DAF with appreciated equities and receive a charitable tax deduction based on the fair market value. The DAF itself is recognized as a charitable entity by the IRS.
2) Sell without immediate tax impact
Once inside the DAF, the securities can be sold without triggering capital gains taxes. In other words, “you can’t touch this” still applies, but now it is working in your favor. The proceeds can also continue to grow tax-free.
3) Give on your timeline
You can distribute funds to charities over time, allowing for flexibility in both timing and strategy.
Consider a simple example. If you donate a position valued at $100,000 with a cost basis of $25,000, you avoid capital gains taxes on the $75,000 gain. At a 15 percent federal rate, that is a tax savings of $11,250. In addition, you receive a charitable deduction for the full $100,000.
As with any strategy, thoughtful planning is important to maximize the benefit. This is where guidance can make a meaningful difference.
At Citadel Wealth Management, we work with clients to build charitable giving strategies that align with their broader financial plan. Whether through donor-advised funds or other structures, the goal is to create flexibility, manage taxes, and support what matters most to you.
If you would like to explore whether this approach may fit into your plan, we are here to help.