November brings us Thanksgiving – a day for simply giving thanks. The 11th month also brings us Black Friday and Cyber Monday – two days encouraging us to shop. And since 2012, November offers us #GivingTuesday, the Tuesday after Thanksgiving where we can come together for one common purpose: to celebrate generosity and to give back.
Giving frequent donations to charities is not easy. Paperwork headaches, particularly related to taxes, abound. Writing separate checks may still be the best option for small gifts. But a popular alternative may make a lot of sense: the donor-advised fund.
A donor advised fund is an account, maintained and operated by an umbrella nonprofit group, called a 501(c)(3) organization, set up by sponsoring organizations. You can open an account and give it any name you want, such as the “John and Jane Doe Foundation.”
You don’t have the expense and hassle of running a real foundation, which is the province of the wealthy anyway. Then, as the donor to the fund, you make contributions to your account. There is often a minimum contribution amount, such as $10,000, along with a minimum balance requirement. But because the Internal Revenue Service does not audit these accounts as it would a private foundation, they don’t have a separate tax ID or requirement to file a Form 990, as is the case with a private foundation. Since your contributions to these vehicles are irrevocable, the sponsoring organization has legal control of the fund.
However, with a donor-advised fund, you as the donor advise the sponsoring organization on how to distribute the money and how to invest it in the meantime. The sponsoring organization typically invests the donor-advised funds in a pool of mutual funds and sets the investment asset allocations. It also usually charges a low asset-based fee to cover administration costs. As the fund’s advisor, you may direct the sponsoring organization to make specific donations to charities you favor. There is often a minimum donation amount from your fund, but it is reasonable and can be as low as $250 per grant.
In addition, you may also choose successor advisors who make those recommendations when you can’t because of illness, disability, or death. This can be a fantastic tool in teaching your children the value of making gifts.
From a tax vantage point, you get the same benefits with a donor-advised fund as with writing a check. Because your contribution to your donor-advised fund is an irrevocable gift to a 501(c)(3) supporting organization, you get full access to the standard charitable tax deduction. The deduction amount that you claim is limited by the type of asset you contribute and your adjusted gross income. And the charitable deduction is earned in the year you make a contribution to your donor-advised fund – not when you advise the sponsoring organization to send money to one of your favorite charities.
There are many benefits to using a donor-advised fund over the traditional “checkbook charity” approach:
If you are the kind of person who recognizes that your accomplishments rest on the good others have done in this world– and you’d like to “give back” in an efficient and practical way – then a donor-advised fund might be your ticket.