A Powerful Tool for Charitable Gifts  – the Donor-Advised Fund

Year-end is a time that many of us think of charity.  And while the tax code encourages giving gifts to charity, if you want to take advantage of the tax break on this year’s taxes, you need to make the gift before year-end.

Many of us simply send cash gifts to charities, but there may be a better way for you to contribute. If you have appreciated assets such as stock which has gone up a lot in value since you bought it (or since it was granted to you via RSUs, or via stock options), you may get a double tax benefit by donating the stock itself rather than selling the stock and making a cash gift. When you donate appreciated assets, you may get a tax deduction equal to the full current value of the asset, just as if it were cash, but if the asset is worth more than you paid for it, you also get to avoid paying capital gains taxes on that gain. And, starting in 2013 you can also avoid the additional 3.8% “Unearned” net investment income tax which is part of the Affordable Care Act. 

Unfortunately, while it may be easy enough to send stock shares to a single charity, it’s not convenient if you want to send gifts to multiple charities, or if you want to send gifts to charities not prepared to deal with stock transfers, or if you want to send smaller gifts.

Moreover, as year-end approaches, you may not have time to decide which charities to give money to.  It’d be nice to be able to make the gift now and decide later where the money should go, so you can take the tax deduction immediately without being pressured to decide where your gifts will go.

Finally, if you are in a higher tax bracket now and expect to be in a lower one later, it’d be nice to be able to make the gifts and take the tax break now, during a higher-tax year, but actually distribute the gifts to the charities you prefer any time you like — including in the future or on your own preferred schedule.

How can we achieve all of these objectives?  There’s a special kind of charity called a Donor-Advised Fund.  Several of the large financial institutions run such funds, and there are hundreds of others organized as local community funds or otherwise.  The way they all work is that you make a gift to the fund and get to take the tax break immediately.  Then, you, the donor, get to advise the fund to make a gift out of the account which tracks what you’ve given.  Since you don’t truly control the money any more, and the gift you made was irrevocable at the time you made it, you get the tax break immediately.  However, you don’t truly control it any more – all you can do is advise the fund to distribute money to charities of your choice.  They will almost always send the money as you recommend, provided the charity you recommend is an approved charity (i.e., 501(c)3, etc).  And in the meantime, once you’ve contributed your gift into the fund and until you ask the fund to distribute the proceeds of your gift to your favorite charities, the fund invests the money, sometimes with your input as to how it’s invested, so it can continue to grow and you may ultimately be able to distribute even more to your favorite charities.

We’ve found donor-advised funds to be a very powerful tool to optimize and maximize your gifts to charities, to simplify making gifts out of appreciated stock, and to establish a family legacy of giving.  It’s far less expensive and much easier to manage than a family foundation (and in fact may have better tax benefits).  And a personal account at a donor advised fund may be established with an initial contribution of as little as $5000.  If you’re considering making gifts to charity, consider looking into a donor-advised fund, or ask us for some recommendations.