Consider whether a donor-advised fund helps build a generous world
The month of November brings Thanksgiving, a day all about giving thanks. It also brings two of the busiest shopping days of the year, Black Friday and Cyber Monday, when we are encouraged to take advantage of deals and get a head start on holiday shopping.
The Tuesday following Thanksgiving brings #GivingTuesday, which is the complete opposite of Black Friday and Cyber Monday. #GivingTuesday was created in 2012 and is all about coming together for the common purpose of giving back and celebrating generosity.
GivingTuesday.org reports that in 2019 alone approximately $511 million was raised online, which is 28% more than the $400 million that was raised in 2018. The hashtag #GivingTuesday received over 20 billion social media impressions.
The expectations for 2020 is that over $600 million will be donated. 2020 Has provided consistent headwinds to our generosity with high unemployment rates, unprecedented numbers of political donations, and donations specifically to aid those who have been impacted by the COVID-19 pandemic. It is expected that the average online gift in 2020 will top $100. Though you don’t have to wait for #GivingTuesday to give back, there are ways to jumpstart your generosity, such as through a donor-advised fund.
Donor-Advised Funds
It is not easy to frequently donate to charities. There are paperwork headaches, mostly related to taxes, associated with it. While writing a check to a cause might be the best option for a small donation, there is a popular alternative that makes more sense: a donor-advised fund.
What is a donor-advised fund? It is an account that is maintained and operated by an umbrella not-for-profit group called a 501(c)(3) organization. An account can be opened and given any name you want such as the “John and Jane Doe Foundation,” but is without the expense and hassle of running a real foundation. You then make contributions to your account as a donor to the fund. There is oftentimes a minimum contribution amount that must be met along with a minimum balance requirement.
Due to the fact that the Internal Revenue Service does not audit these types of accounts as it would a private foundation, a separate tax ID, or the requirement to file a Form 990 is not needed. Since the contributions to these accounts are irrevocable, the sponsoring organization has legal control of the fund.
With a donor-advised fund, the donor is responsible for advising the sponsoring organization on how the money is to be distributed and invested, so as the advisor of the fund, you may direct the sponsoring organization to make donations to specific charities. The sponsoring organization usually invests the donor-advised funds into a pool of mutual funds and sets the investment asset allocations. Most often, there is a minimum donation amount from your fund, but it can be as low as $250 per grant. The sponsoring organization also typically charges a low asset-based fee to cover any administrative costs that may appear.
In addition to this, as the advisor, you can also choose a successor advisor who can make recommendations on your behalf if you are unable to in the case of illness, disability, or death. This can be an amazing tool to teach children the value of making gifts while they’re young with the intent that they will one day take your place.
You receive the same benefits with a donor-advised fund as you do if you were writing a check from a tax standpoint. Since the contribution made to your donor-advised fund is an irrevocable gift to a 501(c)(3) nonprofit supporting organization, you receive full access to the standard charitable tax deduction. The deduction amount claimed is limited by the type of asset contributed and your gross adjusted income. Also in regards to taxes, the charitable deduction is earned the year you make a contribution to the donor-advised fund. It is not earned when you advise the sponsoring organization to make a donation.
Benefits of a Donor-Advised Fund
Using a donor-advised fund comes with an array of benefits compared to the typical approach of “checkbook charity:”
- Your grantmaking has the ability to be separated from the end-of-year deadline to get a deduction in. For calendar year tax planning, you need only the time your contributions were made into the fund (alongside taking your possibly limited charitable deduction). After, you can make grants at your leisure.
- You personally no longer have to keep track of your donations, as the sponsoring organization does this for you. They typically make the grant records available to you online.
- You can stay anonymous if you’d like with your grantmaking.
- The sponsoring organization will check to see if the entity you’d like to donate to is eligible. This further simplifies the responsibilities held in making a charitable donation.
If you are someone that likes to do good, give back, and are looking to do so in a more practical and streamlined manner, then a donor-advised fund might be the right fit for you. Give the professionals at NEST Financial a call to set up an appointment to discuss donor-advised funds and if it’s the appropriate decision for you.