October 07, 2014

Donor Advised Funds

Credit: Renjith Krishnan
Do you want to give money to a good and noble cause, but haven’t really found one that you like? Do you already give cash or appreciated stock to several charitable organizations, but wish you could give more? Are you already giving about as much as you realistically can and still wish you could give more? Perhaps you’ve had a really good year at work, you sold a business, or one of your stock holdings shot up like a rocket, and you want to give charitably over time and not all in one year? If you or anyone you know can relate to the above scenarios, you are not alone, and I may have just the solution you have been looking for: a donor advised fund.

A donor advised fund is an account that is maintained by a sponsoring charitable organization and lets donors give to charity with greater flexibility while still realizing the tax benefits associated with charitable gifting. In English, if you wanted to open a donor advised fund, you would open an account with a sponsoring charitable organization such as Schwab Charitable or Fidelity Charitable, and you would contribute your donations directly to them. This would allow you to lock in your immediate tax deduction just as if you had given a check to the American Heart Association. However, with a donor advised fund, you don’t have to immediately distribute your contribution. For example, if you gave $2,000 worth of appreciated Apple stock in 2014, you could distribute the contribution in 2015, 2021, or whenever you like. You could certainly distribute the funds in 2014 if you wanted to, but you wouldn’t have to, because once you contributed the Apple stock to your donor advised fund, it’s no longer yours. Essentially, you made an irrevocable gift, but you reserved the right to direct where the distribution goes at a later date.

By contributing to a donor advised fund and not immediately distributing your contribution, your contribution “lingers” in your account for a longer period of time. During this time, your contributions can be invested, and any growth will be tax-free. As with any investment, the value of your account could go up and it could go down, but your deduction won’t change (remember, you locked that in at the value of your donation when you originally contributed). This ability to let contributions linger can give a donor time to decide which organizations they want to benefit, and it can give a donor’s invested contributions time to grow and one day potentially offer a greater monetary benefit to a particular charity than the smaller, initial contribution could have offered. (That being said, I know of plenty of good charitable organizations that need money now to advance their cause and further their mission, so you’ll have to personally weigh immediate impact versus long-term financial magnitude.)

If you have a big tax year or your income stream is pretty sporadic (a lot one year, a little for a few years, then a lot again one year), donor advised funds can really be a good fit for you. If you’re charitably inclined, your CPA and financial advisor are probably encouraging you to give in those good income years so that you can fulfill your charitable desires and hopefully maximize your charitable deductions. As we discussed earlier, a donor advised fund will allow you to lock in your donation in that high tax year, but it will also allow you to give as you wish. Another way of saying this would be that a donor advised fund lets someone make charitable contributions sporadically and strategically (to their donor advised fund) and charitable distributions (to qualifying charitable organizations) smoothly, or however they wish.

Finally, what happens if you pass away and still have money left in your donor advised fund? Well, there are several possibilities. You could name charitable beneficiaries that would receive whatever is left in your account, or you could name another person or people as your contingent successor(s) to direct the distribution of assets left in your donor advised fund. Simply naming a charitable beneficiary is smooth and clean, but I have seen cases where naming spouses and children as contingent successors has worked really well. It allows contingent successors to benefit organizations they feel strongly about, and it also powerfully instills how important “giving back” was to the deceased one last time.

A donor advised fund is not for everyone, but I think it’s a pretty nifty tool considering all of the flexibility it offers. It’s sort of like having your own private foundation!


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