I would love to get some input from some of the folks in this Forum. I have a meeting with a financial advisor, possibly this week, to discuss AQR Flex as a way to mitigate a capital gain I expect later this year. It appears to be a long/short strategy aimed at harvesting capital losses while preserving growth.

AQR Flex

Background is that I will sell a business towards the end of this year and likely receive in the neighborhood of $375K in long term capital gains and another $150-$175K in ordinary income. I believe, unfortunately, that my state taxes cap gains as ordinary income. Adding in NIIT on the capital gains, the tax hit from just the capital gains aspect will be over $100K. Same for the ordinary income side.

There is an essentially 0% chance that I will NOT give at least $500,000 to charities over my lifetime. I plan to work two more years and will probably be at 85% of my current salary, then either work part time for a year or two or just quit altogether. Thus, 2026 should be my highest income year ever unless I win the lottery, which I don't play. When I do quit, I will have a second long term capital gains only event of close to the same amount.

I will hear out the advisor on the AQR Flex product, but unless I am missing something, it seems extremely complicated, and potentially risky. We haven't discussed fees on it. Additionally, the advisor says this needs to get established ASAP if we are going to do it because it needs to start capturing capital losses in 2026 as much as possible to offset the anticipated gain.

Assuming I do a Donor Advised Fund, as I am currently strongly leaning towards, what is the best way to fund this? Do I take the proceeds from the business sale and start it with that cash, or sell appreciated stocks instead (I really don't have any huge concentrated single position, either)?

Gracias por any ayuda in advance.

No idea about the Flex product, but I started using DAF as a part of my overall tax strategy a couple of years ago. I do mine through Schwab, and the DAF has appreciated roughly equivalent to the S&P over the past few years.

The AQR flex is a good strategy for generating capital losses. But won't help you much if you implement it late in the year.

If you could it'd be ideal to get the private stock into a DAF or GRAT somehow to avoid the capital gains altogether PLUS get some tax write off on top of that for the charitable gift.

Theres some complex rules around this though that may prevent you from doing it. I think if you have a sale already lined up there may be rules against this.

You could donate other stocks but that doesn't offset your cap gain from sale of business.

AQR Tax Aware Delphi is really interesting tax benefit to give you ORDINARY tax losses. Not capital gain losses.

Thanks for all of the responses. This place seems to line up with what Chat GPT is telling me, so that gives me more confidence. In response, in order:

My Mama Said: I will also be using Schwab for the DAF, which sounds like the right direction to go. Good to hear that it is producing well for you.

TexasAggie98: Appreciated stock donation, rather than taking the business sale and starting a DAF with that cash, is beneficial.

Holistic Planning: The outside advisor (not through Schwab) also said we are "getting going late", so that is reassuring that he isn't just pressuring me. The terms of the sale cannot be changed, and it will be cash (not selling shares in a business), so I cannot do that "end-around" of donating private stock directly to further my tax benefit. It's also funny you mentioned AQR TA Delphi - the same outside advisor who will be pitching the AQR FLEX product got me into the AQR TA Delphi product. My timing was pretty bad, though. It did generate a good bit of losses, but I am down for the little over a year that I have been invested in terms of my principal. No bueno. When I do retire completely, I will be forced to sell an ownership share in a venture and that will present another opportunity to perhaps explore AQR FLEX. With that one, I would make sure to start early in the year. That being said, perhaps it wouldn't make as much sense since that would kind of be the end of my income generating years.

I was at Church tonight and was actually getting pretty excited about having a DAF rather than paying Uncle Sam to do the things he does with what he takes from me. Sorry for the F16 crossover.

Most importantly, thanks to all 3 of you. Cheers

I run an independent RIA and am in both Flex and Delphi+. I have a ton of experience with both products, which is is exactly what they are "products". They can and should only be used in certain situations and should be implemented as part of a full financial plan.

Happy to discuss if helpful as you navigate the business sale. An early congrats!

I just sold part of my company and put $500k into a DAF. We have maintained our current charity giving and the DAF fund is growing. The fund. Control will convert to our kids at death. Wife and I love it although she still tithes each week at church instead of using DAF; Catholic guilt in full swing.

congrats and bunched charitable contributions are the way to go!

Thanks for the responses.

I went ahead and did shift into the AQR FLEX 55 product. I was told that, calculating based on the time it put it in, I should be able to harvest a little under $100,000 in capital losses, which will help my tax bill (assuming the sale of the business happens in this fiscal year). I will still be working after I make the business sale, and there will be another capital gains event when I do finally retire, so perhaps the AQR FLEX product will help out then as well. Unless it makes sense to hold onto it for Roth conversions prior to RMD, I think I will want to unwind it at that point.

As some of the proceeds of the sale will come as ordinary income, I think I will probably go ahead and also set up a Donor Advised Fund at the end of the year. It just makes a lot of sense to do this year when my income will be high due to the sale. And, yes, I will use appreciated stocks to fund it. I already have a DAF with The Catholic Foundation, but I have let it dwindle down. I think the process will be a lot easier to manage staying within the Schwab accounts, while still holding the option to maintain my Catholic guilt.

Just keep in mind that converting a traditional IRA to a Roth is an ordinary income trigger and not a capital gain event, so the Flex product won't help there.

I have also seen folks contribute part of their business interest to a DAF (pre sale) so that 1) you don't recognize any of the income at sale AND 2) get the deduction as well. Obviously, it require more upfront work/valuation, etc but it is a powerful planning tool if you intend to sell a business in the future and have a penchant for charitable causes.

Thank you.
I have a lot to learn!
I never understood the mechanics of Roth conversions, including taxation on the conversions and subsequent growth, withdrawals, etc. It sent me down a Chat GPT rabbit hole looking at qualified distributions, 5-year rule (I am over 59.5), etc. Damn, our tax code is complicated. I pay a crap ton to Uncle Sam as it is, it seems he just wants more.

Unfortunately, I can't contribute a portion of the business. The mix of what will come as cap gains and what will come as ordinary income is also not something that I can shift.

Depending on the size of the sale, you should consider waiting for next year to contribute to the DAF. The 0.5% disallowance applies to gain on sale, so might as well have the 0.5% just apply to your normal 2027 income. May be an immaterial consideration, as I don't know the size of your sale.