Donor advised funds are charitable foundations that commit to following the advice of donors in distributing their accounts to charities. Many community foundations, such as The Boston Foundation, manage donor advised funds for their contributors. The contributor takes the charitable tax deduction in the year she contributes to the fund even though she may not pass the funds on to charities for several years. Some have questioned this as a public policy matter, but it has certain benefits for the donor.
I recently attended a presentation about the Fidelity Donor Advised Fund where many of those potential benefits were discussed. The Fidelity fund currently holds over $12 billion for which the donors have already taken charitable deductions. Fidelity charges a fee of 0.6% a year (60 basis points) to manage the fund plus fees for the investments chosen by the donor, which can range from minimal to significant depending on the investments chosen. So some would argue that these are a greater benefit to Fidelity than to the charities. However, putting that public policy debate aside, a donor advised fund may have significant benefits for you, including the following:
- Better management. Donor advised funds permit you to manage your charitable donations better. Rather than simply responding at random to solicitations, perhaps giving twice to one while forgetting another you would like to support, all of your donations are available to review (on the Fidelity website if you use their fund).
- Easier tax reporting. You will have one charitable recipient to report on your taxes — the donor advised fund — rather than several contributions to report. Of course, you need to be itemizing for this to make a difference.
- Contribute in higher tax years. If your income fluctuates, you can make large charitable contributions to your fund account in the years you are flush, but still be able to contribute to the charities you support every year. In addition, this will mean a larger tax deduction in the years that you are in a higher tax bracket.
- Contribute highly-appreciated stock. If you own a lot of stock that you don’t want to liquidate due to the embedded taxable gains, that charitable fund can sell it with no tax due to its status as a non profit foundation. For instance, if you want to make a $1,000 gift to a charity, you might have to liquidate $1,200 of highly appreciated stock to have this amount after taxes. However, if you give the stock directly, you only need to give $1,000 of it and can keep the additional $200. Of course, this is also true if you gave the stock directly to a charity without the use of a donor advised fund, but such funds may be better equipped to handle such contributions than some small charities you would want to help.
- Involve your children. You can use your donor advised charitable fund to involve your children in charitable giving in a number of ways and at a number of ages. In effect, you can use it to create a small foundation (in some cases very small) and make your children the foundation board. They can choose who should receive grants each year either as a group, or each child could be given his or her amount to allocate. With older children, this can be an occasion for the family to get together each year to decide on distributions. As part of your estate plan, you could leave a larger amount to the fund for your family to manage after you are gone.
- Anonymity. If you would like to make your gifts anonymously (and avoid the many solicitations each act of generosity engenders), a donor advised fund permits you to do so. You can name your account whatever you choose and have the fund deliver the check with or without mentioning your name.
- Regular account deductions. The donor advised fund can permit more intentional budgeting of your charitable contributions by having an automatic amount withdrawn from your checking (or other) account each month. You might decide, for instance, that you want to give $6,000 a year. You can certainly keep track of what you are giving and do so. But it can be much easier to simply have $500 automatically withdrawn from your account and deposited in your donor advised fund to be distributed as you later determine.
In short, donor advised funds are tools that you may use to make your charitable giving easier and more intentional.