Donor-Advised Fund for Charitable Giving

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Elaine Bedel established Bedel Financial in 1989 in Indianapolis. Elaine Bedel established Bedel Financial in 1989 in Indianapolis.

Want to start your own charitable foundation, but don't have the wealth of a Carnegie or Rockefeller? Well, an option exists for the rest of us, too! Donor-advised funds can allow you to establish and potentially grow pools of money to be used for charitable giving.

What is a Donor-Advised Fund?

Technically, donor-advised funds are investment vehicles that are run by independent charities referred to as sponsoring organizations. In effect, a donor-advised fund is an intermediary step between you and a charity or charities to which you wish to donate. Using a donor-advised fund is a way to increase flexibility with regards to your charitable giving. But they do have some drawbacks as well. Is a donor-advised fund right for you? Read on and decide for yourself.

How Does It Work?

Donor-advised funds are investment accounts. While similar to a brokerage or IRA account, there are very important distinctions. One difference is that money contributed to a donor-advised account is dedicated to charitable giving. Once contributed, the funds may not be withdrawn by the donor or used for any other reason. The contributed funds can be invested and any potential growth is tax-free.

Donor-advised funds are established through sponsoring organizations such as a community foundation or the charitable entity of a brokerage firm. The donor can recommend grants be distributed from the donor-advised fund to any IRS-qualified 501(c)(3) charity.

Benefits Offered

The biggest benefit is timing-related. Donors get an immediate tax deduction for any donations. If, for example, you gave to a donor-advised fund today, you would receive a charitable

deduction for the current tax year. However, you do not have to distribute the funds to charities immediately. You can do so at any time in the future. While there is no current law requiring distributions, sponsoring organizations may have disbursement requirements, but they are typically not overly stringent. As an example, Schwab Charitable Fund, a sponsoring organization, requires a $50 grant be made every four-and-half years from their donor-advised funds.

If funds are to be left in place for a time before grants are made, the account may be invested in order to grow. Any interest, dividends, or appreciation realized accumulate on a tax-free basis. This could mean larger gifts to charity down the road.

Another benefit is that in addition to cash, appreciated securities (which have been held for more than a year) can be contributed directly to a donor-advised fund. A donor's charitable tax deduction is based on the fair market value at the time of donation. Individuals can thereby completely avoid paying capital gains taxes on any appreciated securities contributed to the donor-advised fund.

One final benefit is that it greatly simplifies record-keeping for individuals. If contributions are made directly to charities, the donor must maintain proof of each contribution and list them individually on Schedule A of their federal tax return. If contributions to charities are made through a donor-advised fund, the taxpayer is only required to track and record on Schedule A their donor-advised fund contribution(s).

Some Drawbacks

There are minimum investment amounts required to establish an account and minimum grant sizes. These minimums vary among sponsoring organizations. The donor-advised fund will also pay administrative fees and any costs for investing. While typically not excessive, the fees nonetheless reduce the amount available to give to charity.

Tax-wise, there are limits regarding the tax deduction you can receive for donating either cash or appreciated securities to a donor-advised fund. Be sure to check with your tax advisor before making a large contribution. And, as mentioned above, contributions to a donor-advised fund are irrevocable. You cannot change your mind and withdraw the funds for your own use.

If you wish to invest the money, know that you have a limited number of investment options from which to choose. These typically range from a money market fund to more aggressive, equity-based investments. The right choice will depend on your time frame for gifting the funds to charity.

Summary

Donor-advised funds are another tool to be considered for charitable gifting. This strategy can be appropriate in years where you have exceptionally high income (perhaps due to exercising options) or if you have a low-cost, high-value security and face a potentially daunting tax bill. Because there are pros and cons, it is important to discuss this strategy with your financial advisor or tax professional.

This article was contributed by David Crossman, CFA, an Investment Manager at Bedel Financial Consulting Inc.

Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money" segment. Elaine's book, "Advice You Never Asked For... But wished you had," is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at ebedel@bedelfinancial.com.

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