Year-End Planning: Consider the Donor-Advised Fund

You want to make charitable gifts before the end of the year.  You can use the tax deduction.  But you can’t decide on which organizations to support. 2014 Year End PlanningDoes this sound familiar?  Many people have charitable intent – they know they want to give – but they haven’t figured out where to give. This is where the donor-advised fund (DAF) can come in very handy.

What is a Donor-Advised Fund?

A donor-advised fund is a fund sponsored by an umbrella 501(c)(3) charitable organization designed to accept charitable donations and then distribute those gifts as grants to organizations “recommended” (or “advised” – hence the name donor-advised fund) by the donor.  Because the sponsoring organization is a charity itself, the donor receives an income tax deduction for his gift in the year the gift is made.

The advantage for the donor is that the decision can be made later as to which organizations to redirect his or her support.  In other words, a donor can establish a DAF in one year, receive the income tax deduction for the gift that year, but wait to suggest a distribution to one or more organizations in a subsequent year.

Selecting Where to Establish a Donor-Advised Fund

DAFs were first created by community foundations, and many of them continue to sponsor DAF programs.  Contact your local community foundation to find out about its DAF program.

More recently, financial services companies like Fidelity, Vanguard, and Schwab have established charitable subsidiaries that sponsor DAFs.  [Full disclosure: our firm uses Schwab Institutional as custodian and we manage donor-advised fund accounts for our clients with Schwab Charitable.]

In fact, Fidelity Charitable – with 64,000 charitable accounts totaling $12 billion in donor-advised fund assets – was the country’s second-largest charity in 2013 ranked by private support, according to the Chronicle of Philanthropy.

Deciding where to establish your DAF is a matter of personal preference.  Be sure to understand the fees assessed on your donor-advised fund before making a commitment.  Most charge an annual administrative fee plus ongoing investment management fees. Fees are generally tiered based on the size of the DAF account.

How a Donor-Advised Fund Works

DAFs typically operate in the same manner:

  • You make an irrevocable contribution to the DAF.  The money you give cannot be returned to you.
  • Account minimums vary but usually range from $5,000 – $25,000 to establish a DAF.  Cash and appreciated securities are the most common assets used for funding a DAF.  Some sponsoring organizations will also accept real estate and other, less liquid non-cash assets.
  • Most DAFs will allow you to name your fund, as in the “John and Mary Jones Charitable Fund” or something similar.
  • Your DAF account grows tax-free. Donors are generally able to advise on how the assets are invested – sometimes selecting from a menu of investment portfolios (from very conservative to very aggressive) or from a list of individual asset classes.
  • When you’re ready, you recommend grants to the charities you wish to support.  Here’s a key point: your role, once your DAF is funded, is strictly advisory.  The sponsoring charity has the responsibility of conducting due diligence on the organizations you recommend and approving (or rejecting) your grant request.  The sponsoring charity is not bound to approve your grant requests.
  • The sponsoring charity does all the work: cuts the check to the grant recipient, including a cover letter specifying any restrictions on the gift, and reports back to you on giving activity within your DAF account.  You can choose to remain anonymous to the grant recipient.
  • Depending on the DAF program, you may be able to name “successor” advisors – someone who will take over the account after you pass away.  This can be attractive for those who wish to pass on a legacy of philanthropy to the next generation.

The Bottom Line

Donor-advised funds are flexible and easy to establish, and they can serve as a powerful tool in your year-end charitable planning.

Comments or feedback?  Contact me on Twitter @juanros.

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