Why Use Donor-Advised Funds?

Anyone use donor-advised funds?

For those of you who don't know, here's what Wikipedia says about donor-advised funds:

A donor-advised fund is a charitable giving vehicle administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A donor-advised fund offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation. Donors enjoy administrative convenience, cost savings and tax advantages by conducting their grantmaking through the fund.

Because the fund is housed in a public charity, donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Further, donors do not incur the cost of establishing and administering a private foundation, including staffing and legal fees. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over the contribution, granting the donor advisory status. As such, they are not legally bound to the donor, but make grants to other public charities upon the donor's recommendation. Most foundations that offer donor advised funds will only make grants from these funds to other public charities, and will usually perform due diligence to verify the grantee's tax-exempt status.

And for a different (though similar) perspective on them, here's a recent Wall Street Journal piece on donor-advised funds:

Ok, so let me get this straight:

• Let's say I have shares in some mutual funds that I want to give away.
• I give them to a donor-advised fund.
• I get the tax break now.
• I get to recommend a charity to the donor-advised fund to give to. They may or may not give to the charity I recommend.

There are a couple things I don't understand about this system:

• Why would I want to give shares to a fund that MIGHT finally give them to the charity I want to donate to? Isn't controlling where the money goes a very important part of giving? Why would I want to give up control? My sense is that the donor-advised funds do go with the recommendations often -- as long as the charity is well-known, such as the American Cancer Society, MDA, etc. But what if I want to give the money to my church? Is Fidelity or whoever has the donor-advised fund going to give it to the church? I don't know. So why would I give it to a donor-advised fund and give up control?

• Why don't I just give the shares to the organization directly? Seems like it would cut out the middleman.

Maybe donor-advised funds are useful when someone wants to give and isn't exactly sure (or doesn't care) who the money should go to? In that case, they can give, get the tax deduction, then decide later to award the money. Is that the advantage here? If so, then donor-advised funds aren't for me.

Anyone out there use donor-advised funds? If so, I'd appreciate your thoughts on why you do so.

Comments

[LC]

from www.donoradvisedfunds.com/faq.html

"Most established religious organizations and educational institutions are not listed as 501c3 nonprofits but are nevertheless tax-exempt charitable organizations."... so churches count, and I've never heard of them going against the recommendation.

I know someone who has one of these set up. It's good because he can donate appreciated stocks, etc, without paying capital gains taxes on them. I guess it's also a good way to force yourself into giving money if you budget it all at the beginning of the year or something :)

Another thing to consider is a charitable trust, which I think is like giving your whole estate to a charity except giving a living allowance to a beneficiary. Someone I knew did this so when he died his wife got a check each month and then when she died, the rest of the money went to the church. Again, there were a lot of tax benefits to this as well.

[FMF]

LC --

Ok on the church point, but I still don't understand why you wouldn't give them the appreciated stocks/funds directly.

[Paul Williams]

First, donor advised funds almost always follow the "recommendations" of the donor. This is one reason the IRS is looking closely at their status for tax deductibility.

Second, you might want to use it if you have a large amount you want to donate over a period of time. You can allow the money to grow (by investing in the stock market) while giving a portion of it every year. DAFs require a 5% distribution every year, which should leave room for the portfolio to grow if it's properly invested. That may not fit into your giving strategy, but some people like that. And if the financial industry can find someone who wants a type of product, they'll usually create it!

It's kind of like having your own foundation, but without all the hassle and cost. Think of the foundations you hear about on PBS.

It also makes it easier if you want to donate the shares to several charities over a period of time. Instead of doing all the paperwork for each of those charities, the DAF will do it for you.

It's not for everyone, but for some situations it works out well.

[Kevin]

I think the point is to give a whole bunch to the donor-advised fund at once when you need the deduction, then actually give away the money over a period of time when you decide who or what to give to.

I have a couple clients that use private foundations for this purpose and that's exactly their reasoning. We're talking millions of dollars of giving here, this isn't for someone who wants to give a few hundred or even few thousand to a charity.

[Jim]

I've been using a donor-advised fund for my giving for about 6 months now. I've never had a problem with directing giving exactly where I want it to go. The setup is actually a lot more like a bank account with online bill payment than a recommendation system. I have an account balance split between several funds, and it's very easy to recommend a grant.

My major motivation to use a DAF rather than just donating stock directly is that it seems tacky and burdensome to drop a stock certificate in an offering plate.

There are benefits beyond tax advantages, though. Mainly, these funds make recordkeeping a lot easier. Rather than keeping track of dozens of individual donations (and double-checking the receipt from the receiving organization and trying to reconcile discrepancies), I have a small number of lump-sum donations on one receipt that's easy to verify. Also, if I give stock to the donor-advised fund, they provide me with pre-filled tax forms to account for the donation, which is a major help. (The tax forms for these things are a lot more complicated than you'd think they should be.)

[Jim]

Seems that if you just want to give money to your church or another specific charity that one of these funds would not give you any benefit.

I guess the main benefit with these funds is that you can pile money into an account and then distribute it later. That might be helpful if you want to grow your money over time for some reason or if you simply are undecided where to donate.

Jim

[MrH]

I think the point may be to give as much as it takes to optimize tax savings (when you need the deduction), while retaining some discretionary control of the money for as long as possible!!!

Then, you decide and confirm whose appropriations are consistent with your own goals. And, after you decide and confirm who will make the most appropriate use of your contributions, then, actually grant the use of the money. (maybe, over a period of time?)

-Maven