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So Just What Are "Donor Advised Funds"?

You may have noticed recent articles about Donor-Advised Charitable Funds in the financial press. Also, some of the big investment houses (Fidelity, Schwab, Vanguard, etc.) are now pitching donor-advised funds affiliated with them. Because we thought you might be interested in the concept, we are writing to explain how these funds operate. Here's the story in a nutshell.

How They Work

As you know, a major disadvantage of public charities is that you lack any control over when and how your contributions will be spent. Donor-advised funds address this concern by allowing you to essentially set up your own charitable giving fund ("The [Your Name] Charitable Fund") in the form of an account. You can then recommend how the money in your account should be spent by designating your favorite tax-qualified public charities, how much they should receive, and when. (The fund legally can reject your recommendation but rarely if ever will unless, for example, you name a charity that's not tax-qualified.)

Some funds allow you to recommend distributions to specific charities in amounts as small as $250. Some donor-advised funds also allow you to name a successor adviser for your account. The successor adviser can then continue to recommend how your contributions are spent long after you have departed. Preferably, the successor adviser can name yet another successor adviser to follow in his or her footsteps. In this way, control over how your contributions are used continues indefinitely.

Minimum initial contributions are around $10,000 to $50,000, depending on the fund. Later contributions can be made in smaller amounts. After your contribution is made, the fund handles all the administrative aspects. Until the contribution principal is spent, it earns income and can continue to grow tax-free. Funds associated with brokerage houses (Fidelity, Vanguard, etc.) also normally allow you to designate how your contributions are invested until distributed by selecting from several investment pools containing various mutual fund alternatives. This gives you an additional element of control. Tax Considerations Donor-advised funds are themselves tax-qualified public charities. As such, they offer three important tax advantages. First, your contributions are tax deductible. The deduction is immediate-even though the fund may actually dole out your money to recommended charitable causes over a number of years and even though your contribution may occur at year-end. So you can get a tax deduction when you need it, while actual payouts from your account can be deferred until later, allowing the account to hopefully grow in the meantime.

Second, if you contribute appreciated securities (either stock or mutual fund shares) that you have owned for more than one year, you can deduct the full current market value. You also avoid any capital gains tax on the appreciation. In contrast, many small public charities are not equipped to accept contributions of appreciated securities-which eliminates a major tax advantage for you. Finally, contributions reduce the value of your estate for estate tax purposes.

Fund Management Fees

A donor-advised fund will charge an annual fee equal to a percentage of your account balance to handle the account's investments. In addition, the fund will probably charge another fee to cover other administrative and marketing costs, including any commissions paid to brokers. Obviously, the lower the fees the better. In comparing donor-advised funds, this is a significant consideration.

Conclusion

As you can see, donor-advised funds offer a nice package of advantages for charitably inclined individuals who wish to contribute substantial sums (but not so large that the expense and effort of setting up a private foundation are justified). If you have questions or want more information on donor-advised funds, please give us a call.