A donor advised fund is a charitable giving account that is designed to grow, as well as make gifts to charities. It’s designed to grow by being invested in the markets, and as the donor you periodically recommend grants (gifts) to qualified charities you want to support.
When you first learn about a donor advised fund, it’s one of those concepts that sounds too good to be true. That’s because there are so many benefits wrapped into this type of charitable giving account.
How It Works, The 4 G’s:
You make a donation to the donor advised fund with the intent of funding gifts. Your donation is an irrevocable charitable gift, to the donor advised fund administrator which is set up as a qualified public charity (IRS 501(c)(3) organization).
Because the donor advised fund is established as a qualified charity you receive (get) an immediate tax deduction on the full amount of your contribution. The donation is considered a completed gift at the time it is made to the donor advised fund administrator.
The donor advised fund is a charitable giving account that can be invested in the financial markets with the opportunity to grow tax-free. The donor (usually along with their financial advisor) recommends the underlying investment strategy that fits the goals of the account.
The donor requests grants from the donor advised fund to other qualified charitable organizations. The donor recommends amounts, timing, and recipients. Grants can be requested during the donor’s lifetime or during the lifetime of a successor donor.
That sounds great, but why is a giving account better than writing checks directly to a charity?
A donor advised fund charitable giving account provides flexibility in several ways. It streamlines the process of record keeping – you simply track the amount you contributed to the donor advised fund and don’t have to worry about mailing individual checks. And, your money also has the ability to grow tax-free over time, potentially increasing the amount you can use for charitable gift making.
How do the tax benefits work?
As mentioned, you’ll receive an immediate deduction on the donation to the donor advised fund administrator. IRS rules currently allow for cash donations of up to 60% of your adjusted gross income.
Highly Appreciated Assets
Many donors use a strategy of contributing highly appreciated assets to the fund as a way to stretch tax benefits even further. By donating highly appreciated assets to the fund you can eliminate the capital gains tax on the eventual sale of the appreciated asset. IRS rules allow for a deduction in the amount of the asset’s full market value, up to 30% of adjusted gross income.
Minimum Giving Activity
This varies by fund administrator. While not mandated, active grant making is encouraged for every charitable account and should be considered on an annual basis. If your account doesn’t make any gifts for a year or more, you can be asked to do so.
Let’s Summarize the Benefits
- Tax deductions on contributions
- Tax-free growth on investments
- Highly appreciated assets may avoid capital gains tax
- Streamlined record keeping
- Ongoing support of your favorite charities
- Anonymous contributions are available
With so much to offer you can see why we love the Donor Advised Fund. Please let us know how we can help you with your charitable giving strategy.
*The opinions voiced in this material are for general information only. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.