Donor Advised Funds are Getting AttentionSubmitted by Mission Financial Planning on May 1st, 2020
Donor Advised Funds have received a lot of attention lately. A quick primer: They let you make a tax-deductible contribution into designated investment accounts which can grow until you make distributions to charities of your choice.
Financial Planners recently heard from the Financial Planning Foundation along with FPA, NAPFA, the CFP Board reminding us that this would be a great time for those clients with Donor Advised Funds to make grants to struggling non-profits.
For those who have been funding Donor Advised Funds, the money has already been set aside for charitable purposes, giving would not affect your cash flow, and the help would be much appreciated in this time of great need.
Attention also heated up with tax-reform; some clients were missing out on their tax deductions for making charitable contributions, and Donor Advised Funds offered a solution. Many clients are “bunching” several years’ of charitable contributions together to get beyond the standard deduction level so contributions make a difference on their taxes. With the increase of the standard deduction, continuing to make your normal annual contributions each year may not make a difference because you may not even need to itemize with the higher standard deduction. Whether to a Donor Advised Fund or a favorite charity, bunching donations can help.
The full contribution to a Donor Advised Fund is tax deductible in the year it occurs*, then that money is invested (growing without tax implications) and available to disburse at any time.
What are some situations when Donor Advised Funds make sense?
- When you want to set aside money for charity and get a tax deduction and aren’t sure which charities you want to fund, or you’re not ready to give the charity the entire amount yet. You can get the money into the charitable “giving account” and make distributions as needs arise, charities are identified and the timing is right.
- When you want to simplify your record keeping you can make one tax-deductible donation into the Donor Advised Fund, which is all you need to track for tax-deduction purposes. Then you make distributions to all your usual charities out of the account as you wish, now or in years to come.
- When you have appreciated assets in after-tax accounts, you can donate them directly to a charity or a Donor Advised Fund and avoid the capital gain on the appreciation while still getting the charitable tax deduction.
- When you have a Foundation that has outlived its usefulness, it can be transferred into a Donor Advised Fund which is much less expensive and easier to manage. Donor Advised Funds typically have lower fees, and have no required distributions and no tax returns.
- When you want to leave a charitable legacy, you can list charitable beneficiaries for your Donor Advised Fund to go to upon your death, or you can name successor donors to continue in your footsteps.
- When you have big charitable intent without big Foundation money, the Donor Advised Fund can let you have a foundation-like Giving Account with relatively low minimums.
- When you would like an easy way to do anonymous giving, the Donor Advised Fund allows you to give without leaving your name.
Donor Advised Funds can be set up through companies like Fidelity, Vanguard and Schwab, or local community foundations.
Using a Donor Advised Fund can simplify your charitable life, but at the same time they can add extra steps and fees. We would be happy to talk through the pros and cons of these accounts, let's find time to talk.
*there are some limits on all charitable contributions as a percentage of income.