Charitable Giving with a Donor-Advised Fund

An easy, tax-smart way to manage your charitable giving.

Perhaps the easiest way to grasp the potential of a donor-advised fund is to think of it as a way to make grants to charities without the expense and responsibilities of running your own private foundation. Here’s how a donor-advised fund typically works. You establish a private account with an organization that sponsors donor-advised funds. The organization is itself a public charity, such as a community foundation, a university, or perhaps the charitable arm of a brokerage or mutual fund company. You then contribute cash or other assets to your account, which is invested so it may grow overtime. Because the sponsoring organization is a public charity, you can take an immediate tax deduction for the cash and assets you contribute, even before a single grant is made. When you are ready to make grants, you simply advise the sponsoring organization of your choices. Although the sponsoring organization has legal control over your account and the authority to decline your grant recommendations, it will generally follow them as long as they adhere to the organization’s guidelines. You can contribute all of the funds in your account quickly, or you can space out your grants over time. The flexibility to make tax-deductible contributions now and grants later can be very attractive in certain situations. Let’s say, for instance, that you want to make a charitable gift by the end of the year for tax reasons, but you do not have enough time to choose the charities you want to benefit from your gift. A donor-advised fund allows you the time to make thoughtful choices while meeting your immediate financial goal of a tax deduction. Or let’s say that you want to establish a tradition of giving in your family. A donor-advised fund provides the structure to invest your gift and make grants on an ongoing basis, perhaps involving members of your family in the selection of grant recipients.

Tax Benefits

Using a donor-advised fund offers several tax advantages.

As with charitable gifts in general, you must itemize deductions on your tax return to claim a deduction for your contributions. Keep in mind that the deduction for charitable contributions is subject to limits based on your adjusted gross income (AGI). The limits, however, are more generous for contributing to a donor-advised fund than to a private non-operating foundation. As a result, donations to a donor-advised fund may result in a larger tax deduction. For example, the deduction for cash donations to donor-advised fund or public charity is generally limited to 50% of your AGI, while the deduction for cash donations to a private non-operating foundation is generally limited to 30% of your AGI.

Privacy

If you prefer to keep your charitable activities private, a donor-advised fund may be the right charitable vehicle for you. When recommending grants, you may have the option to have the grants made anonymously rather than in you fund’s name. Plus, sponsoring organizations do not report grants to the IRS on a fund-by-fund basis, helping further shield your charitable activities from public scrutiny. Anonymity is not an option with a private foundation, which must report its distributions on tax returns that become a matter of public record. 

Easy to Manage

Donor-advised funds are generally very easy to set up and manage. The sponsoring organization typically handles all of the administrative tasks, such as tracking your contributions, investments, and grants, providing you with periodic financial statements, and disbursing the grant money to your chosen charities. All this administrative support leaves you free to focus on recommending grants. The sponsoring organization typically assesses a fee from your account for administration, but the cost is generally significantly less than the cost to establish and run your own private foundation.

What to Look for in a Fund

The differences among the sponsoring organizations can be significant, so it is important to review their policies before opening a donor-advised fund account.

Types of Assets You May Donate

Donor-advised funds can generally be funded with cash and appreciated assets, such as stock, mutual fund shares, and real estate. Not all sponsoring organizations, however, accept all types of assets so it is important to confirm what they will accept before choosing one.

Minimum Contributions, Balances, and Grants

To help determine whether a sponsoring organization is a good fit for you, be sure to check out the minimum amounts required for the initial contribution, additional contributions, the account balance, and grants. The amount needed to open a donor-advised fund typically ranges from $5,000 to $25,000, amounts that put them well within reach of many donors.

Investment Options

With a donor-advised fund, the sponsoring organization typically allows you to recommend the investment pools in which your account is invested. So before choosing a donor-advised fund, be sure to check out its investment options and performance- after all, one reason for opening an account is so that the amounts you contribute to it grow over time.

Succession Plan

What happens to any funds remaining in your donor-advised fund account at the end of your lifetime? Some sponsoring organizations will let you name a successor who can continue to make grant recommendations after your death. If your goal is to establish a lasting charitable legacy that your family can continue after you are gone, it is a good idea to find out how many generations the sponsoring organizations will permit.

 Is a Donor-Advised Fund Right for You?

If the idea of making contributions now and recommending grants to your favorite charities on you own timetable appeals to you, a donor-advised fund may be a good choice. It may also be a good choice if you simply want an outside organization to handle recordkeeping associated with your charitable giving. Also, a donor-advised fund can be a good choice for individuals and families who are weary of the administrative tasks and expenses of running their own private foundations.

PLEASE NOTE: All investing involves risk, including the possible loss of principal.  

Of course, a donor-advised fund is just one way to achieve charitable goals. To find out more tips and information on donor-advised funds or other charitable options, contact our two Copper Leaf Financial Vermont Offices.

33 Blair Road, Williston, VT 05495 | 802.878.2731

49 North Main Street, Rutland, VT 05701 | 802.878.2731