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Flexible Giving: Understanding Donor-Advised Funds

Flexible Giving: Understanding Donor-Advised Funds

Giving to charity is a generous act, but determining where and how to give and then tracking your donations for tax filing purposes can turn an otherwise heartwarming activity into a big headache. As a result, a growing number of philanthropic Americans have turned to donor — advised funds.

Donor-advised funds allow individuals, families, companies and other entities to put assets into a charitable account and receive a tax break for their contributions that year, even if they haven't yet designated specific charitable causes. Contributions may include cash, securities, real estate and other assets. Donors who’ve opened donor-advised fund accounts can recommend grants from their accounts to charitable organizations at any time, once they are verified by the firm managing the fund.

And because donors can often invest the funds in a donor-advised fund, it effectively allows an individual or family to create their own charitable foundation.

The Growth of Donor-Advised Funds

Donor-advised funds, which date back to the 1930s, are managed by nonprofit charitable organizations known as charitable sponsors. Sponsors include national organizations like the National Philanthropic Trust (NPT),  as well as smaller community-based groups. In the early 1990s, financial institutions began establishing their own charitable organizations so that they, too, could manage donor-advised funds and have since become major players in the donor-advised fund landscape.

The number of donor-advised fund accounts has jumped in recent years to 238,000 in 2014 from some 184,000 in 2010, while the value of assets they hold has more than doubled to $70.7 billion from $33.6 billion in the same time period, according to a report by NPT.

The Benefits of Donor-Advised Funds

The potential for tax deductions isn’t the only reason donors may be drawn to donor-advised funds. Donor-advised funds can make it simple to donate to multiple charities and to track a donor's history of giving.

When Elizabeth Kadin, a New York City resident, wants a reminder of what organizations she's donated to in the past, she checks an online record of her giving provided by the Jewish Communal Fund, the sponsor that manages her donor-advised fund account. When Kadin wishes to direct more donations to specific charities—ranging from hospitals to summer camps for the disadvantaged—doing so just requires a few clicks of the mouse, she said.

"I never have to put anything in an envelope," Kadin said. "I find it so easy that I actually think I'm more charitable now."

Patrick Mendis, of Washington D.C., also appreciates the ease of donating through donor-advised fund accounts. Mendis initially opened a donor-advised fund with ImpactAssets — a Maryland-based nonprofit that specializes in "socially responsible" investing — so that he could donate to disaster relief efforts in his native Sri Lanka following the 2004 Indian Ocean tsunami.

Today, Mendis, who is a professor of public and international affairs, uses his account to make donations for scholarships at universities here in the U.S. and schools in Sri Lanka.

"Whenever I want to make any kind of donation, most of the time, (the charities I prefer) are listed in their system and it's very convenient for me to do it," he said.

Sometimes using donor-advised funds can help donors discover new avenues for giving. Nancy Pollard, who has a donor-advised fund account with a community organization in Austin, Texas, says the organization opened her eyes to local causes.

"It provides us with information on local agencies in need which we may not have otherwise ever known about," she said.

The Limits of Donor-Advised Funds

Those considering opening donor-advised funds should be aware of what some consider a major drawback of donor-advised funds: once money is contributed to a donor-advised fund account, that contribution is irrevocable.

It is the same as if you already donated to a charity. Just as you can’t claw back a donation, money deposited in a donor-advised fund can’t be withdrawn later, nor can the funds be inherited by the donor's beneficiaries. That makes it different than other investment funds. Donors should be cautious about locking up large amounts of capital in donor-advised funds just for the sake of a speedy tax break.

Depending on the charitable sponsor, a donor can name successors, such as children, to make donation decisions regarding the account for years to come but, again, the money can only go to charitable causes, not to the successors' own bank accounts.

Since funds from donor-advised fund accounts aren't always disbursed to charitable causes in a timely fashion, even after the donor has passed away, some argue that money and assets can sit in those funds indefinitely.

“[I]nstead of providing immediate relief to the needy and fuel to the economy by paying for goods and services, much of this money does nothing at all for an indefinite period,” Ray D. Madoff, a professor at Boston College Law School, wrote in an opinion piece for the New York Times.

The rate of payout of donor-advised funds has dipped in recent years, from 24.7 percent in 2010 to just less than 22 percent in 2014, according to the NPT report. But the actual dollar amount of those payouts has increased: In 2014, nearly $12.5 billion in donor-advised fund assets were distributed to charities, up from $7.2 billion in 2010.

If you're interested in opening a donor-advised fund account and are deciding on a charitable sponsor to manage your account, here are some questions to consider:

What is the reputation of the donor-advised fund sponsor?

All donor-advised fund sponsors must meet IRS charity criteria and all have boards of trustees. If you're interested in learning more about a particular donor-advised fund sponsor, review the makeup of its board of trustees, check its IRS Form 990 (which provides information about the sponsor's programs and finances), talk to other donors who have worked with the sponsor and consult your financial advisor.

What is the minimum value of assets required to open an account? 

Many sponsors require an initial contribution valued at least $5,000 or more. But the minimum contribution can be significantly higher, such as $25,000.

What is the minimum value of additional contributions?

Additional contributions to a donor-advised fund account often must meet a certain minimum value, typically ranging from $1,000 to $5,000.

What are the fees associated with the donor-advised fund account? 

Sponsors may charge fees for administrative services, financial advising and other services.

What causes are included in the sponsor's list of donation options? 

Generally, donor-advised fund sponsors will facilitate donations to any federally-recognized charity recommended by a donor. Some donor-advised fund sponsors, however, don't offer the option to donate internationally.

Charitable sponsors typically reserve the right to deny recommendations for certain grants. Requests to pay for tickets to charitable events, for instance, are often denied because such tickets are not fully tax deductible.

Ask about a sponsor’s restrictions before opening an account.

What are the investment options for an account? 

Sponsors often offer various investing options for the money in donor-advised fund accounts, including mutual funds and bond funds that may allow you to continue to grow the value available for donation over time.

What kinds of assets does the charitable sponsor accept? 

The most popular types of contributions to donor-advised funds are appreciated securities and cash, although some may choose to contribute other assets such as real estate and art. Not all charitable sponsors, however, have the ability to sell illiquid assets for the purposes of donation. If you are interested in contributing an illiquid asset, check that a sponsor is willing to accept it before opening an account.

What is the minimum amount of money that can be granted to a charitable cause at any one time? 

Charitable sponsors often require that any grant from a donor-advised fund account to a charity meet a certain minimum. That minimum can vary from less than $50 to a few hundred dollars or more.

How will my contributions affect my tax liability?

Your tax deduction will depend on the type of assets contributed and the size of your contribution. Consult a tax professional for more information.