Gratitude leads to giving
There are several reasons why individuals give money away each year to charitable organizations. Some believe that it is a means of “giving back” to a community that helped you reach your fullest potential. Others believe that charitable giving is a mutual benefit to both the giver and receiver. The receiver can use those funds to help just causes, while the giver can feel a greater sense of worth by playing an essential role in helping others.
Regardless of your reason for giving, many studies prove that practicing gratitude daily can reap a number of benefits to your physical health and your mental health. Charitable giving is one such practice of gratitude that we can all find ways to incorporate into our financial plans.
Enter donor-advised funds
Donor-advised funds are a unique type of giving account in which the donor contributes money or assets with the purpose of allocating those funds to charitable organizations through grants. Once the account is established and funded, the donor can continuously contribute to it and actively participate in the decision-making process for distributions.
It’s important to note that donors cannot withdraw or take back those funds once they are deposited into the accoun!
Funds are then managed and administered by a third party, called sponsoring organizations. According to IRS regulations, these sponsoring organizations must be classified as 501(c)(3) organizations, like public foundations or National Donor-Advised Organizations. The IRS also enforces regulations concerning what can be considered a donor-advised fund and how taxes will be imposed on those funds. For example, those funds cannot be distributed to an individual.
Donor-advised funds have been growing in popularity over the past few years, mainly for the tax advantages they offer. Recent data from the National Philanthropic Trust shows at least a 16% increase in assets held in these particular funds from 2018 to 2020!
So what are the advantages to a donor-advised fund?
Pros
- Immediate tax benefits
With a donor-advised fund, it doesn’t matter if you choose to allow the funds to grow or distribute them immediately to a particular organization. Either way, you will still receive tax advantages when you contribute.
What exactly are the tax advantages? For one, if you contribute cash, you can receive a federal income tax deduction of up to 50% of your AGI (adjusted gross income). So, if your AGI for the year was $500,000, then you could receive a tax deduction for up to $250,000 of the contributions you made to this fund.
And those benefits reach farther than just cash contributions. If you donate securities, like stocks and bonds, you can deduct up to 30% of AGI. In addition, should you choose to contribute an ownership stake in a limited partnership, you won’t have to pay capital gains taxes either.
- Advisory privileges
This advantage might be obvious in the name “donor-advised funds,” but it means you have a say in which organizations will benefit from your contributions. You can choose to appoint an advisor to this fund or utilize the professionals available at the sponsoring organization.
Another great thing about these funds is that you can recommend grants for charities whose causes are important to you, as long as those entities are classified as 501(c)(3) organizations. These could be local charities or religious organizations whose principles and values you hold dear.
- Ease of administration
Many individuals with charitable hearts find donor-advised funds to be a simpler vehicle for donating their funds. Instead of giving money and assets to a number of different charities and needing to ensure accurate record-keeping of those donations for taxes, this fund allows giving to be centralized in one place. You don’t need to keep individual receipts as all transactions are held within this one fund.
Now, what are the drawbacks to a donor-advised fund?
- Minimum donation requirements and administrative fees
As with most investment accounts, there are usually minimum donation requirements for this particular account. There are not only initial deposit requirements but also minimum donation requirements. The initial deposit requirement can vary based on the sponsoring organization, but many range from $0 to $25,000, whereas subsequent donation requirements could be as low as $1,000. It’s important to verify those requirements before setting up a donor-advised fund.
Administrative fees can also vary, but it’s usually a percentage of the account’s total value. Most fees are also tiered, which means a 1% fee may be imposed on the first $100,000 and a 0.75% fee on the next $400,000.
There are also investment fees and maintenance fees that may also be applied. Some organizations offer $0 maintenance fees while also charging higher investment fees. It’s best to read the fine print when it comes to comparing accounts.
- No final say in distributions
Though donors can make recommendations to the sponsored organizations as to which grants they would like to fund, it’s still the organization that has the final say in how the assets are allocated.
- Many rules and regulations to follow
Donor-advised funds have a long list of rules regarding who the funds can be given to and how they can be distributed. For example, scholarships can be granted with the funds, but a scholarship committee has to be established to review applications. In addition, the committee cannot have more than 50% of the donor’s family members on the board.
Furthermore, a donor cannot receive personal benefit from the grants that they fund. For instance, a donor could not accept free season tickets to a college’s football games if they funded a scholarship opportunity for the school.
When to consider a donor-advised fund as part of your financial plan
Because donor-advised funds have hefty initial deposits, it’s best to consider starting one when you have the ability to safely set aside those funds. Remember, once those funds are deposited into the account, you cannot access them in the event of an emergency!
You can also look at your tax returns from the past few years to see, on average, how much your annual giving is to 501(c)(3) organizations. This can help you decide if your giving level would justify the fees associated with a donor-advised fund.
A personal financial advisor can help you ascertain whether or not this would be a good fit for your long-term financial plan. We can analyze your individual situation to find those potential tax savings both now and in the future with your estate planning. We can also factor in your financial goals for the future to see if the benefits outweigh the costs associated with this type of giving.
Sources:
https://www.happify.com/hd/5-scientific-facts-that-prove-gratitude-is-good-for-you/
https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
https://www.investopedia.com/terms/d/donoradvisedfund.asp
https://www.ncfp.org/knowledge/are-there-any-important-limitations-to-using-a-donor-advised-fund/
https://www.consumerreports.org/charitable-donations/donor-advised-funds-things-to-know/
https://www.uscharitablegifttrust.org/donor-advised-funds.php
https://www.nerdwallet.com/article/taxes/donor-advised-funds
https://www.philanthropy.com/article/administrative-fees-for-donor-advised-funds/
