Using a donor advised fund for charitable giving

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 Q. What can you tell me about “donor advised funds” for charitable donations? Although I was aware of the tax benefits of using stock which had appreciated significantly for donations, I found it impracticable for donations of $50 to $100. Then I learned about a low-cost donor advised fund which could be funded with a low amount of stock and used for donations of $50 or more, while the unused portion could be invested and appreciate. It seems to simplify tax recordkeeping, too. What do you think?

A. There are lots of ways to give to charity.

While you’ll find satisfaction in helping others, you can also help your tax and estate planning situation. Donor advised funds are one way to go.

“A donor advised fund is a charitable gifting vehicle wherein individuals or institutions can make irrevocable charitable contributions to an account, to be used for the benefit of an unnamed charitable organization at a later date,” said Chadderdon O’Brien, a certified financial planner with Lassus Wherley in New Providence. “The benefit to the owner of a donor advised fund is that the contribution is tax deductible immediately, while the gift to the charity does not have to be made until some future point in time.”

He said acknowledgement letters for charitable gifts into the fund are easy to access which is helpful when you are completing your tax returns.

Once a contribution has been made to the fund, the proceeds can be invested for the benefit of your charitable interests, O’Brien said. All investment income and gains are treated as tax exempt, but must be retained within the charitable fund.

“Distributions from the fund can occur at anytime and many of the well established donor advised funds already have electronic links to many popular charities including; universities, religious organizations and other nonprofit organizations,” he said.

At the point when the account owner decides to make a distribution to an approved charitable organization, the assets transfer directly from the fund to the desired organization, O’Brien said.

He said charitable funds are typically used by individuals or institutions whose primary goal is to gift to already established charitable organizations.

There are some restrictions.

For example, creating a scholarship fund at your alma mater.

“In this example, the donor’s agreement to establish a scholarship fund cannot be legally binding and the donor typically cannot have the final decision over who receives the scholarship,” he said. “Rules specific to the fund you are interested in should be reviewed relative to your philanthropic goals.”

O’Brien said at the inception of the fund, the donors provide direction as to what should happen to the fund when they die or become incapacitated, and the options for succession are very flexible.

“One of the primary methods is that a successor donor or donors can be named,” he said. “The successor(s) will direct the charitable distributions after the original donor has died or has become incapacitated.”

O’Brien said another option is to name one or more organizations as charitable beneficiaries. In that case, the remaining assets in the fund would be distributed per the directions of the beneficiary assignments after the original donor has died, he said, and the assignments and directions can be changed at any time.

He also said donor advised funds can be a powerful estate planning tool. While the donor receives an immediate deduction for income tax purposes, the donated assets are also removed from the estate.

As for cost, O’Brien said donor advised funds typically charge an annual administrative fee based on the level of assets in the fund. The Charles Schwab Charitable Fund, for example, charges 0.6 percent annually on assets up to $500,000. Expenses are tiered downwards as asset levels increase, and account minimums and minimum distribution amounts will vary across providers.

“While a donor advised fund does not make sense for everyone, it can be an effective income tax and estate planning tool,” O’Brien said. “In addition to the tax benefits, the charitable funds may allow the donor to control the investment of the charitable dollars. Make sure you read the fine print before establishing an account to prevent issues in the future.”

If this isn’t the strategy for you, be sure to know the right way to give stuff to charity, and learn about how to give your Required Minimum Distributions directly to charity.

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This story was first posted in January 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.