Weeks before the personal tax return deadline on April 15, workers everywhere rush to beat the tax man at his own game. One of the best ways for taxpayers to hang on to more of their hard-earned money is through the use of donor-advised funds.


Donor-advised funds allow givers to make immediate deductible charitable contributions without having to choose a specific charity at the time that the donation is made. This type of fund provides several benefits to users, including immediate tax deductions, avoidance of capital gains on appreciated assets and low administrative costs.

Also, donor-advised funds are much simpler to use than foundations and require much less paperwork and bureaucratic maintenance.

Let's take a look at an example:

Example - Itemizing Charitable Donations Jim and Barb McElroy looked over the tentative tax return that they had prepared during the first week of December. Their combined income was approximately $125,000, and they were hoping that they would be able to itemize their deductions on their tax return. But the numbers were not encouraging; they had just bought their first home in September and their mortgage interest and property taxes were several thousand dollars less than their standard deduction. Of course, they could make up for the shortfall with a charitable contribution, but the McElroys need some time to research which charity they'd like to give money to. This will take more time than they can spare between now and the end of the year. Here is where donor-advised funds come into the picture. These funds can help the McElroys achieve their goal of itemizing deductions without having to immediately decide on a charity. (To read more about donating and taxes, check out Deducting Your Donations and It Is Better To Give AND Receive.)

Characteristics of Donor-Advised Funds

According to the Council on Foundations, in order to be considered a donor-advised fund, the fund must meet the following characteristics:

  • It must be able to separately identify and track each donor's contributions.
  • The fund must be owned and controlled by a specific organizational sponsor.
  • The donor or a person appointed by the donor must have, or must reasonably expect to have, the privilege of providing advice with respect to the fund’s investments or distributions.

Fees and Limitations

Donor-advised funds may charge a fee, such as 1% per year, for the services they provide. The majority also have minimum thresholds for both initial and subsequent donations, such as $10,000 and $500, respectively. The downside to these funds is that most nonprofit organizations do not require any specific donation amount and will not charge donors a fee for their monetary gift. But if you give to a donor-advised fund, you will be paying the fund to take your money.


Despite the obvious drawback, donor-advised funds offer a number of benefits to consumers that many individual charities cannot duplicate. They include:

  • Immediate contribution and planning.  Donor-advised funds offer the ability to take an immediate contribution deduction without having to decide on a specific charity. As mentioned previously, donor-advised funds allow contributors to separate tax planning from charitable planning.
  • Complete record-keeping services.The fund will keep records of the amount, date and intent of each donation and send the donor an annual statement detailing all transactions and donations for tax purposes. This can greatly simplify the giving process for donors who plan to allocate funds to several different charities by requiring only one letter of substantiation from the fund instead of one from each individual charity.
  • Investment services. Donor-advised funds offer a variety of investment choices, such as mutual funds, which can allow contributions to grow while the donor decides how to allocate the funds. These funds are also equipped to sell and process securities sales from donors who wish to donate appreciated securities instead of cash to reap additional tax benefits. This makes it easy for donors who wish to sell a single large block of securities to distribute the proceeds among several different charities.
  • Creation of long-term giving programs. Donors can set up programs that provide an ongoing income stream to charity, which can continue after death. In these cases, a successor is appointed to manage the funds after the donor's death.
  • Confidentiality. Donor-advised funds allow the donor to remain anonymous, if desired.

The fund's ability to sell and allocate securities makes it an ideal vehicle for charitable stock donations. A charitable contribution deduction equal to the stock's fair market value can be taken, although the deduction will be limited to 30% of the donor's adjusted gross income for the year. If you would still like to donate an excess, all excess deductions can be carried forward for five years. Capital gains tax will also be avoided, provided that the stock has been held for at least one year before the sale. This allows donors to effectively contribute a larger amount to the charity by allowing it to keep what would otherwise be paid in taxes. (To read more, see Can I donate stock to charity?)

Excise Taxes

The Pension Protection Act of 2006 created a new tax that can be levied on donor-advised funds, which may be subject to a 20% excise tax, plus a 5% tax to be assessed on the fund manager for distributions to any individual for any purpose, and distributions not made for charitable purposes. This tax is essentially designed to prevent key donors and their associates from taking loans, grants or other forms of compensation from the fund. Any donor, advisor or other associate who does this can also be subject to a 125% excise tax.

The Bottom Line

Donor-advised funds can serve a useful purpose in tax planning – and permit donors to be thoughtful in how they allocate their charitable giving. If the McElroys decide to make a $10,000 charitable contribution via a donor-advised fund, they will be able to itemize their deductions and decide how to allocate the funds at a later time. There are literally thousands of qualified charities to which they could contribute; all they have to do now is find one that champions a cause they believe in. Meantime, for a nominal fee, the McElroys have conveniently managed to both achieve their financial objectives and set themselves up to make the world a better place.

To read more about taxes, see 10 Steps To Tax Preparation and Still Time To Cut Your Tax Bill.

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