A donor-advised fund can maximize how your donations are working for causes you care about.
If you’re at all interested in charitable giving, then there’s a good chance you’ve already heard about donor-advised funds. They’re the fastest-growing option for philanthropy today, used by a wide range of people at many different income levels.
There are some good reasons why it might make sense to choose a donor-advised fund to help give back to your community or a cause you care about. Before making any decisions, however, it’s a good idea to familiarize yourself with how these funds work, what makes them appealing to some donors, and why other donors should advance with caution.
Why not just give a lump sum to charity?
A donor-advised fund has a couple of advantages that make it preferable to a one-time gift. Speaking technically, it’s a segregated fund that’s maintained by a qualified public charity -- in IRS. lingo, a 501(c)(3) organization. When you make a gift of cash – or of assets like stocks, mutual funds, or even bitcoin and works of art – just as with any charitable donation, you get an immediate income tax deduction. That deduction can be as high as 60% of your adjusted gross income for cash, and 30% for assets.
But because it’s a fund, your donation can also appreciate in value without you being charged the capital gains tax you’d normally face on assets that grow in value. The amount you give can multiply before it reaches your recipient, meaning your gift grows even bigger and can do even more.
By establishing a fund, you’re technically giving control of the money over to a “sponsoring organization” (which is why the fund is called “segregated”). However, you maintain the ability to make grant recommendations indefinitely for how the fund makes its distributions, and how it invests its assets. Even better, those “advisory privileges” can be passed down to your heirs as well. They’ll be able to keep steering the fund’s good works after you’re gone.
What’s the idea behind donor-advised funds?
These funds were created as a way to make philanthropy available to more kinds of people. Contributions can be as low as $5,000. Companies have also made it possible to create aggregated funds – in other words, letting multiple donors give money more effectively with fewer transaction fees than they could individually. In effect, you have an account like a bank account. Every deposit gives you a tax deduction, and the only withdrawals are charitable donations.
The idea has proved popular. In 2020, there were more than a million donor-advised funds with a collective value of $159.83 billion, according to figures from the National Philanthropic Trust.
Of those funds, about 1,000 were run by community foundations, locally oriented charities that were some of the earliest adopters of donor-advised funds. Another 55 were run by private corporations, including all the major financial-management services, as a way to allow investment clients to give more effectively. Public foundations have also created many donor-advised funds, either focused on geographic regions or specific social issues, like scholarships for promising scholars or encouraging peace initiatives. A financial advisor can help you find a fund that supports an issue close to your heart.
Why wouldn’t I do this?
The only significant downside to a donor-advised fund is that you do put your giving under IRS. scrutiny. They’ll want reassurances that the fund really is giving money to charity and not being used to either make questionable charitable donations (for the income tax deduction) or tax-sheltered payouts to the donors or their families (avoiding the capital gains tax).
That scrutiny means that once you make your deposit – that is, once you donate cash or assets to the fund – that decision is irrevocable. You get an immediate tax break because the donation is made immediately (even if the money is disbursed later, under your recommendation or the recommendation of your heirs).
The fund can hang onto your donation for years before it ever reaches the intended charity. Hopefully it’s growing in value during that time, but it doesn’t have to. Private foundations are required to donate 5% of their value annually, but a donor-advised fund has no such requirement. Once donations finally are disbursed, they might face fees or might have to reach a minimum donation level before they go to your chosen charity, or whichever charity the fund’s broker chooses.
That’s the final drawback: the broker who controls the fund has the final say in how funds are disbursed. They must listen to your recommendations and your advice, but they’re not legally obligated to follow it. That’s part of the “segregated” nature of the funds; they’re not private foundations, and by law they have to be separated from you, your family, and your personal interests. Otherwise, a donor-advised fund would be able to act as a free lunch for donors looking for a fast double tax break, when the point of these funds is to make charitable giving easier and more efficient. For the most part, though, the aims of a fund are clearly spelled out, and the whole purpose is to support worthwhile causes.
Once the account is set up, you can easily fund it. At Brentwood, we can help set charities up with donor-advised funds. Then your donation can be as seamless as moving money from your account over to the donor-advised funds account. If you’d like to learn more about donor-advised funds that align with your own charitable goals, our financial advisors can help provide details suited to your personal situation.
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