It’s natural during the holiday season to think about helping others in need or contributing to worthy causes. Reviewing a list of charities is one way to go, but you might also consider another.
Donor-Advised Fund
A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual.
Thanks, Investopedia. But what does that mean?
Donor-advised funds aggregate contributions from multiple donors, and then distribute them to charities. You can donate one amount to a DAF and then direct which charities will receive donations and when. Similar to giving directly to charity in that the funds are a complete gift (you can’t get the money back), these contributions are tax deductible to a qualified organization, and can accept donations other than cash, such as stocks.
There are community foundations that focus on local charities, faith-based DAFs, and public foundations that concentrate on charities that focus on a specific issue or region. The question is…is this the right solution for you?
The Pros & Cons
The good news is that you can give to multiple organizations with just one donation to one administration. In other words, no need to track multiple receipts.
The other benefit is that you can donate in one year for tax purposes, but then time the actual donation to the charity for another year.
DAFs also have staff members who are well-versed in the charities of focus and can assist you with your selections if you don’t have specific organizations in mind. This means you know your contributions will be going to reputable charities and the funds will be used wisely. Less research for you!
However, there are a few “cons.” Donor-advised funds charge administration fees and therefore profit from your donation – money that could otherwise be going directly to your charity. There could also be high minimums ($5k-$25k) and if you don’t direct your donation to a charity, it can languish unused. It might grow in value, but it’s not benefitting society as you intended.
What Should You Do?
Charitable giving is a highly individual decision. While it may be personally important for you to “give back,” it’s also important to make sure your giving is within your budget.
If you choose to donate to organizations outside of a donor-advised fund, there are a few other things to look for:
- Make sure the charity to whom you are giving is reputable.
- Research how much of your donation is actually used to provide services vs. administration costs.
- Make sure the charity meets IRS standards for your donation to be deductible.
Which solution is right for you? That’s where I can help. We’ll take a look at your tax obligation, possible strategies for donating appreciated stock, and how any charitable giving might have an impact on your retirement plan.
