Checklist: Reach Charitable Goals Using Donor-Advised Funds

Checklist: Reach Charitable Goals Using Donor-Advised Funds

Donor-advised funds are growing in popularity, and it’s easy to see why. Working as a charitable investment account, these philanthropic vehicles provide donors with flexible, tax-effective ways to support the life-changing work of nonprofit organizations. In addition, donor-advised funds can involve the entire family and provide a legacy of sustained giving to important causes for years to come.

How Donor-Advised Funds Work

A donor-advised fund is a specialized account dedicated to charitable giving, and the basic concept is simple: A donor contributes to the fund as often as desired and subsequently recommends specific grants to favorite charities when they are ready.

Here’s how it works:

  • A donor-advised fund is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization.
  • Once a donor-advised fund is opened with a sponsoring organization, the account owner can make tax-deductible contributions to the fund in the form of cash, securities, real estate, and other assets as permitted by the fund.
  • Gifts to donor-advised funds are irrevocable and thus are no longer part of a donor’s personal wealth. As a result, donor-advised funds are not subject to either estate tax or probate.
  • While the sponsoring organization has legal control over the contribution to the fund once it has been made, the donor continues to have significant influence over the account. The account owner decides how the assets in the fund are invested and —most importantly— recommends grants to specific charities at a time of the donor’s choosing.

Sponsoring organizations encompass a wide range of entities, including national charities, community foundations, alumni associations, and investment firms that manage charitable trusts. Schwab, Fidelity, and Vanguard are among the largest organizations managing donor-advised funds in the country.

Advantages of Donor-Advised Funds

Donor-advised funds offer several attractive advantages that can help you meet your needs and goals, including:

Immediate tax benefits
You can claim a tax deduction for the year in which you put assets into a donor-advised fund; the amount and timing of any actual grant has no bearing on the tax deduction.

Growth potential
Donor-advised funds are typically invested and grow tax-free, increasing your giving capacity and impact when you are ready to recommend a grant.

You do not have to identify nonprofit beneficiaries when you make tax-deductible contributions to your donor-advised fund, and you can distribute your contributions and investment gains to recipients over as long a period as you wish.

Family involvement
Family members may be included in decisions about giving, and you can name beneficiaries for your donor-advised fund to continue with your giving as part of your legacy plan.

The sponsor of a donor-advised fund handles all the paperwork, including recordkeeping and disbursements.

Low minimums
With minimums as low as $5,000, donor-advised funds are available to a wide range of individuals and families.

If you wish, grants from your donor-advised fund may be made anonymously.

The tax advantages of donor-advised funds are especially noteworthy when making a gift of a security with long-term capital gains. You can avoid capital gains tax on appreciation and receive an income-tax charitable deduction for the fair market value of the contributed securities. The asset’s value can continue to grow in the fund, providing the potential to amplify your giving in the future.

Get the Most out of Your Donor-Advised Fund

A little planning at the outset can ensure that you maximize your charitable giving with a donor-advised fund. While establishing a donor-advised fund is straightforward, there are several questions to consider. To get the best possible counsel on the tax, legal, and investment implications of a donor-advised fund, it’s important that you meet with your trusted advisors to help you determine the best route to take.

  • Define your philanthropic goals
  • What are your values and interests?
  • Why do you want to give?
  • Are there specific charities or causes that you want to support?
  • What is your planned timeframe for giving? Is it during your lifetime or part of your legacy planning?
  • Plan for asset donation
  • Which assets will be donated?
  • Do you plan to donate assets one time or over a period of time?
  • Does the fund accept assets other than cash and publicly traded securities?
  • Engage family members in your philanthropy
  • Who will be involved in decisions regarding charitable giving?
  • Is it important to you to include family members in your philanthropy?
  • If so, how do you wish to involve family in defining values, setting objectives, and working collaboratively to achieve philanthropic goals?
  • Understand your investment options and fees
  • What investment options are available in the fund?
  • Are values-based investing strategies such as environmental, social, and governance (ESG) funds among the choices?
  • How do the fund’s investment options compare performance-wise with peers?
  • What fees and expenses are associated with the fund — investment, administrative, other?
  • Plan processes for recommendations and grants
  • What is the process for making recommendations to the sponsor?
  • What are the requirements for an organization to receive money from the fund?
  • Are there limits on grants, e.g., minimum amounts, maximum number of grants each year?
  • What reports will you receive and how frequently?

Donor-advised funds can play an important role in meeting the philanthropic goals for you and your family.

To learn more about charitable giving options, contact your Key Private Bank Advisor.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

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