Last week, I gave myself a crash course in donor-advised funds. Unfortunately, it was too late, as I didn’t have time to act before the end of the year. I did, however, learn a lot, so I thought I’d share some of that knowledge with you.
What is a donor-advised fund?
A donor advised fund is essentially an umbrella charity run by an investment company. You can make donations into an account over which you serve as an “advisor” and take an immediate tax deduction. You can then advise the company on how to invest the money, as well as when and where to direct the funds in the form of a charitable grant.
Advantages of donor-advised funds
The primary advantage of a donor-advised fund is that you can use it to aggregate charitable contributions in a specific year even if you want to spread the donations themselves out over time. This can help maximize your tax savings while giving you time to make prudent decisions about who gets what (and when).
Beyond the above, you can also directly donate appreciated stocks, mutual funds, etc., which saves you from paying capital gains taxes on them prior to the donation. While some charities are set up to take such donations, others aren’t. A donor-advised fund makes this strategy available to all.
Finally, if you make lots of charitable contributions, a donor-advised fund can simplify your paperwork. Instead of getting receipts from many individual charities, you get a single tax receipt. This is especially helpful if you want to donate securities, as outlined above.
Disadvantages of donor-advised funds
The biggest disadvantage of a donor-advised fund is that you technically lose control over the money. According to IRS guidelines, your contribution must both irrevocable and unconditional. While you are allowed to advise the fund on how to invest and when/where to donate funds in your account, all such moves must be approved by the fund.
In reality, this is less scary than it sounds, as the approval of grant recommendations is typically automatic as long as the recipient is a bona fide charity. In fact, I’ve never heard of a case where a legitimate grant request has been turned down. The restrictions come because the fund itself is technically the charity to which you’re donating.
Other downsides to donor-advised funds are management fees and minimum investment requirement. While the fees aren’t huge (typically less than 1% plus whatever expenses are associated with the underlying investments), they are definitely something to consider. As for minimum investments, the lowest values I’ve been able to find are in the $5k range for the initial contribution with subsequent contributions starting at $500.
What about taking credit vs. remaining anonymous?
If it’s important to you to receive credit for your donation (i.e., for the recipient to know who you are), then you’re in luck. Donor-advised funds allow you to name your fund (e.g., The Smith Family Charitable Fund) and will provide the recipient with contact details when they disburse the funds.
Conversely, if you’d prefer to remain completely anonymous, a donor-advised fund can provide an additional layer of isolation between you and the ultimate recipient. Thus, you can make truly anonymous donations
Who offers donor-advised funds?
Donor-advised funds are available through a number of mutual funds families, including Vanguard, Fidelity, Schwab, and T. Rowe Price.
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this type of situation in that he/she may change the beneficiary should he/she choose to do so.