AMERICANS ARE a generous people. They gave $471 billion to charity in 2020, according to Giving USA. Of that sum, 69% was contributed by individuals like you and me, as opposed to foundations or corporations, plus another 9% took the form of bequests.
Are you charitably inclined? Donor-advised funds can offer a tax-efficient way to make financial gifts, allowing folks to fund their own giving foundation and then direct money to charities for years to come.
A donor-advised fund can be established at any number of institutions, including community foundations, mutual fund companies, brokerage firms and universities. And you don’t need to be a Rockefeller to get started. Initial minimum contributions vary but can be as little as $1.
When you set up a donor-advised fund, you get to name it. Many donors name them after their own family, just like those big foundations that sponsor NPR programs. You also determine how the money you give will be managed. In exchange, fund providers will charge fees, which can include administrative and investment expenses. They’ll also disburse the gifts. Legally, they control the money you’ve given them. But as the name “donor advised” implies, the gifts are almost always made to a charity you care about and in the amounts you recommend.
To get started, you do have to give something away. You can fund the account with an irrevocable contribution of personal assets, which can include cash, stock, real estate and more. You usually receive the maximum tax deduction allowed by the IRS in the year the donation is made. The fund itself, however, can endure for many years. In the meantime, your contribution can be invested and grow tax-free. Gifts are typically made when you suggest, though many providers mandate some minimum level of giving, such as $50 every three years.
Here are three reasons to consider using a donor-advised fund for your charitable giving:
1. Tax minimization. Recent tax law changes raised the standard deduction, so it’s $12,550 for single filers and $25,100 for married filers in 2021. To rise above the standard deduction and thereby receive some tax benefit from their charitable gift, taxpayers can bunch several years of donations into one by endowing a donor-advised fund.
For example, a married couple may be planning to give $15,000 a year to a broad array of charities. Generous as they are, that amount is too small to earn them any tax benefit because it’s beneath the standard deduction. Let’s say they have the resources to bunch two years of giving into one, and give $30,000 to a donor-advised fund. They realize a $30,000 tax deduction in that year—and the money can still be given over a two-year timespan.
2. Tax avoidance. A donor-advised fund can be used to avoid certain taxes altogether. Say you have stocks with significant unrealized capital gains. You also have gifting plans that could be satisfied over the next few years with these stocks. You might contribute these appreciated stocks to a donor-advised fund. That way, you’d enjoy the tax deduction immediately, avoid capital gains taxes on the sale and fund the charitable gifts you planned.
3. Estate planning. A donor-advised fund can help lower legal costs and reduce the complexity of estate planning. Instead of listing each charity in your legal documents, you can identify your donor-advised fund as the recipient of any charitable donation. You would then leave instructions with your donor fund on how the money should be given away. If you suddenly decide to add a bird sanctuary to your giving plans, you need only update your fund instructions, not your estate planning paperwork.
Phil Kernen, CFA, is a portfolio manager and partner with Mitchell Capital, a financial planning and investment management firm in Leawood, Kansas. When he’s not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via LinkedIn. Check out his earlier articles.