What's a Donor-Advised Fund and Why Should You Care?
It’s the holidays, and the season of giving is in full swing. Many of my clients are thinking about giving back and wondering how they can best use their charitable dollars (while maximizing their tax deductions) before the new year begins.
If you want to keep it simple, you can always write a check or otherwise donate directly to the organization you care about. But I want to use this post to highlight another option that can work really well for regular givers: Donor-Advised Funds.
What’s a Donor-Advised Fund?
Donor-Advised Funds are like personal charitable savings accounts. The money you contribute is reserved for charitable organizations, but it doesn’t get released to them until you decide to distribute your donations. Think of them as a temporary holding area for your charitable dollars.
They offer two big tax advantages. When you deposit money into the fund, you get an immediate deduction. And once the funds are there, they grow tax-free.
Donor-Advised Funds are offered through most major financial firms, including Fidelity, Charles Schwab, and Vanguard. You can open one just as you would any other investment account. Typically, these options require a minimum initial contribution of $5,000 or more. A more flexible option is Growfund, which is great if you’re just getting started. Growfund lets you open an account for as little as $1.
Most Donor-Advised Funds do charge an administrative fee on any funds you keep in the account. The fees vary by provider, but are typically between 0.6% and 1.0% of the balance per year.
It Makes Charitable Giving Easy
I have a Donor-Advised Fund through Renaissance, which is a sponsoring charity. I like it because it separates the timing of when I want to give money to a charity and when I want to do something strategic for tax purposes. When you set it up, you can name it anything you want. Ours is called the Lum Family Donor Fund. When I contribute, I get a tax break, and later on decide how I want the funds to be invested. If I wanted to donate $1,000 to the American Heart Association, I would just instruct the fund to please send that amount to the AHA. If I wanted to set up a regular annual donation to the AHA, I could do that too. You can give to your college, church, or any cause that you care about as long as it’s a registered charity.
Before I had my Donor-Advised Fund, I used to donate shares of stock to charities. But the process was much more complicated. If you’re doing anything other than writing a check, like donating stock or other assets, it’s easier through a Donor-Advised Fund. And it comes with another nice bonus: When you donate shares to the fund, you don’t have to pay the capital gains tax that you normally would on assets that have appreciated in value. That’s right: no capital gains tax, and you can still take a charitable tax deduction on the value of the stock.
A Path to Giving More
I do want to add a note of caution here. While I think it’s great that Donor-Advised Funds allow people to separate tax considerations from the decision to donate, I try to make sure that no funds are sitting there for more than two years. There are generally no time restrictions for when you have to give. But these accounts are not meant to be used as a tax shelter.
For my family, having a Donor-Advised Fund has helped ramp up our charitable giving. I think it’s made us donate more to the causes we support because it’s created a front-loaded source of funds that can be used over time. Now I’m looking for charitable causes to support because I know I have the funds stashed away and ready to go. If you give to charity every year and the idea of a Donor-Advised Fund appeals to you, you can always set up a free introductory meeting with me to learn more.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alyssa Lum, and all rights are reserved. Read the full Disclaimer.