Giving to Charity With a Donor-Advised Fund

To make a significant commitment to charitable giving, consider a donor-advised fund.

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Most Americans regularly donate to a few favorite charitable causes, simply writing a check or making an online donation when they can afford it. If you’re ready and able to make a significant commitment to charitable giving, however, you may want to investigate other methods of giving. Consider setting up a donor-advised fund—a special account, managed by investment experts, from which you make your donations. It may give you some tax advantages and foster family involvement in giving.

Lots of people are deciding that donor-advised funds (DAFs) are a good idea; there are now an estimated 150,000 DAFs in this country. More than $8 billion was donated in 2012, and these funds now hold more than $45 billion in assets, according to the National Philanthropic Trust.

How DAFs Work

A DAF is an account you set up at a qualified public charity, called the “sponsoring organization” of the DAF. You no longer own or control the money, but you direct its investment and keep advisory privileges regarding distributions.

The sponsoring organization will probably follow your recommendations for grants, but it isn’t required to. The organization wants to be sure it’s giving to a tax-exempt charity—if it doesn’t, it faces a big penalty (excise tax) on any amount given for a non-charitable purpose.

There are many large, national sponsoring organizations, including the charitable arms of big financial services companies such as Fidelity and Vanguard. Universities and hospitals sponsor DAFs for donors who want to give to their programs. Community foundations, which give grants to local charities, also sponsor DAFs, as do independent nonprofit organizations such as the National Philanthropic Trust.

The sponsoring organization manages the money (for a fee). If you go with a financial services company, your investment options will be limited to the company’s own investment funds, unless the amount is very large ($1 million, at Vanguard).

When you donate cash or other assets to your DAF, you make an irrevocable gift, and you get an immediate charitable tax deduction. There are limits on the amount you can deduct, but they’ll affect you only if you want to give a very large amount: you can deduct up to 50% of your adjusted gross income each year when you donate cash, and up to 30% of your AGI for assets that have appreciated (gone up) in value since you acquired them.

If you donate appreciated assets—stocks or real estate, for example—to the DAF, you can avoid capital gains taxes and take a tax deduction for the fair market value of the assets.

How long will the DAF last? It’s up to you. You can name a charitable beneficiary to receive the funds in the account at your death. Or, if you want to establish a family tradition of philanthropy, you can name someone to take over your role of advising on investments and grants after your death. If you decide that you aren’t happy with the sponsoring charity’s management of the fund, you should be able to transfer the account to another sponsoring organization. (Make sure, before you sign up, that this is possible.)

Learn more about DAFs and taxes from the IRS.

Who Needs a DAF?

A DAF isn’t really necessary unless you have a substantial amount to give, and each sponsoring organization has a minimum donation amount. The National Philanthropic Trust’s minimum is $25,000, but many organizations (for example, the Fidelity Giving Account program) require just $5,000.

Donor-advised funds are usually compared to private foundations, another way for individuals or families to set up a tax-advantaged way to make large charitable donations over a period of years. Here is how DAFs and private foundations compare on some key issues:

Set-up costs and hassle. You don’t need to hire a lawyer to create a DAF; the sponsoring organization will be happy to help you with the paperwork, which is generally pretty straightforward. Setting up a private foundation, on the other hand, usually costs several thousand dollars in legal fees.

Management. You’ll pay a fee for a professional to manage the money whether you create a DAF or a private foundation; the cost will probably be comparable. A private foundation, however, must file an annual tax return, which adds an administrative expense. If you have a DAF, the sponsoring organization will take care of the taxes.

Simplicity. Especially if you go with a big sponsoring charity, you’ll probably be able to monitor your account and recommend grants online.

Tax deduction limits. If you donate cash to your DAF, you can deduct up to half of your adjusted gross income; with a private foundation, the deduction is limited to 30% of your AGI.

Taxes on growth of the funds. If funds in a private foundation generate income, you’ll pay an excise tax (about 2%) on the amount. Growth of funds in a DAF is tax-free.

Privacy.  A foundation’s tax returns show how much you donated to it; your contributions to a DAF are not a matter of public record. You can also have the sponsoring organization make grants to charities anonymously if you wish.

Minimum payouts. Private foundations must give away at least 5% of their assets annually; DAFs have no such obligation. Many do, however, give away much more than 5%.

Control. A foundation lets you keep total control over your money. You create your own board of directors to govern the foundation. With a DAF, you delegate some control over grants to the sponsoring charity, and your investment options are limited.

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