Many of us think about making charitable gifts as we head into the end of the year. Private philanthropy has always played an important role in American society and personally, it’s a nice way to show appreciation and support for those causes that we value. Charitable giving also provides an opportunity to do some tax planning, as gifts to public charities are commonly tax-deductible.
One challenge donors sometimes face is timing: the point at which someone is ready to make the deductible gift may not match well with the decision of which charity to support. This is especially so for large gifts. For example, a donor wishing to give $20,000 in a particular year may not be able to determine exactly how to allocate that money before year end. Should one organization receive the whole thing? If not, what size gifts are appropriate?
The donor advised fund (DAF) is a tool that’s been around for many years, however it’s still not widely known. DAFs are funds that are managed by a public charity, many times a subsidiary of a larger financial institution. As a gift to a public charity, the gift is deductible. However, the gift balance resides in the DAF until the donor is ready to send it to a charity of their choosing, whether that decision process takes a few days or several months.
How much control does a donor have over a DAF? Technically, once you have made a gift to a DAF, you’ve ceded control to the charity administering the fund. Any subsequent grants you make from the fund are technically “advised” rather than directed, though in practice, DAF sponsors only require that recipients are non-profit public charities, or 501(c) (3) corporations.
There are several good resources for DAFs: Charles Schwab, Fidelity, and Vanguard each offer DAFs with reasonable expense ratios. When reviewing DAF options, there are several factors to consider including the minimum initial and on-going gift balance, and the total costs of fund administration. As well, many DAFs are set up to receive gifts of appreciated property (like stock). Finally, for larger balances, some DAF sponsors will allow you to invest the balance in mutual funds or even hire an investment advisor to manage the fund for you.
If you have questions about DAFs and how to establish one, let us help you. Charitable giving is a laudable exercise in and of itself. Like many honorable activities, there are smart tools to maximize the impact of your giving. DAFs are a great planning tool to help you do well, while doing good.