According to the National Philanthropic Trust (NPT), Americans donated over $389 billion in 2016. Most of that money, 72% to be exact, came from individual donors. Most of those donations likely went directly to qualified 501(c) charitable organizations. However, more and more people are using donor advised funds as their charitable vehicle of choice. Individuals planning to make a charitable gift before the end of the year may wish to consider a gift to a donor advised fund as well.
How Donor Advised Funds Work
Donor advised funds are charitable vehicles that allow for an immediate tax deduction of a financial gift during the tax year in which it was made. A $10,000 donation to a donor advised fund before December 31, 2017, counts as a 2017 charitable donation and will be a deductible expense on the 2017 tax return. (For related reading, see: Cut Your Tax Bill With Donor Advised Funds.)
However, unlike a direct gift to a charity, donor advised funds may retain assets and pay out charitable gifts at a later date. The donor determines who receives funds and when they receive them. For example, a donor could give $10,000 to a donor advised fund today, and spread that gift out to a number of charitable organizations over a period of years. Or the entire gift could be paid out in 2018, but the donation still counts as a tax deduction for 2017.
Reasons for Giving to a Donor Advised Fund
If you are an investor who is charitably inclined consider these five reasons for giving to a donor advised fund this year.
- If your income was unusually high this year, it might pay to max out your charitable contributions in 2017 rather than spreading them out over the coming years. Maybe you received a bonus, sold a business or exercised your company stock options. An unusual windfall like this could push you into a higher tax bracket for the current tax year. Making a charitable donation now, when your tax bracket is high, reduces the total amount of taxes you will pay on this windfall. If you wait until a future tax year to make your charitable donation, this opportunity may be lost.
- If your total itemized deductions are less than $24,000 next year (assuming you are a married person who files jointly with your spouse), you will use the standard deduction and likely pay the same Federal income tax bill, whether you make a charitable contribution or not. So, a 2017 donation to a donor advised fund may make sense, since you can write it off this year. Next year, if you take the standard deduction, you may give up the ability to deduct your charitable donation.
- Avoid capital gains taxes on appreciated assets. When you gift appreciated assets like stock, mutual funds or real estate, the capital gains tax that would normally be due on the sale of those assets is avoided. A cash donation of $10,000 to charity provides a tax deduction of $10,000. However, if you donate a stock valued at $10,000 that was purchased for only $1,000, you also avoid the capital gains taxes that you would owe on the sale of that stock. For most taxpayers that is a savings of 15% of the $9,000 capital gain - the difference between the value of the stock and what you paid for it - in addition to any amount you save off your Federal income taxes.
- You haven’t decided where you want your donation to go. One of the major advantages of donor advised funds is that you get the full tax benefit of making a charitable donation today, but you can decide where you want your money to go tomorrow, next year, 10 years from now or whenever. There is no time limitation for donor advised funds. Perhaps you would like to support a faith-based organization that feeds the hungry. There are dozens, if not hundreds, of such organizations around the country. Deciding which one is right for you could take some time. With a donor advised fund, you can make your donation and take the tax deduction now, then take all the time you need to do your due diligence before disbursing your gift. (For related reading, see: Tips on Charitable Contributions: Limits and Taxes.)
- Create a charitable legacy that supports your favorite causes for years to come. Aside from the tax deduction (which should never be your reason for making a financial gift), the real benefit of donor advised funds is that you control who gets what and when they receive it. Since there is no requirement that you must use up your donor advised fund by a specific date, you could instruct your donor advised fund to divvy out a percentage of the balance or a specific dollar amount each year. Or you could see what the year brings and provide financial support to disaster victims, humanitarian crises, capital campaigns and other charitable giving opportunities as they arise. You get to decide.
The Pros and Cons
Everything has its pros and cons. Before committing a large dollar amount to a donor advised fund, be sure to consider the following drawbacks.
- Donations to donor advised funds are irrevocable. Even though you control which organizations get your money and when, your donation is no longer yours once you deposit it into your fund. There are no do overs.
- There are over 250,000 donor advised funds. Fees and expenses vary. However, administrative fees at the largest donor advised funds are about 0.6% plus any fees associated with your investments.
- Most donor-advised funds have account minimums to meet. Two of the three largest donor advised funds have minimum account balances as low as $5,000. If you wish to gift smaller amounts, a direct donation to your charity may make more sense.
- Some donor advised funds may limit your investment options, place limits on the types of organizations you can support or set a minimum disbursement amount for each charitable gift.
Donor advised funds can help you start your own personal giving legacy. (For related reading, see: Donor Advised Funds: The Benefits and Drawbacks.)