Donor-advised charitable fund: Good for your heart with tax benefits

​“If you can’t feed a hundred people, then feed just one.” -  Mother Teresa, Roman Catholic religious sister who lived most of her life in India. (1910-1997)
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BY JULIA ANDERSON
For tax benefit reasons and because we like to support good causes, Americans donate to charities. Over a year, my donation checks might go to my grandson’s elementary school foundation and to MercyCorps, the Portland-based international aid organization.

I support a local historical society, an arts group or two and my alma mater. At the end of the year, I add up these donations and claim the total as a charitable tax deduction when I itemize my federal income tax return.

Maybe this nickel and dime charitable giving isn’t enough for you. It may feel haphazard. And there are those dinner-hour phone calls from certain charities asking for more money. Or let's say your financial picture has changed because of big increase in annual income or because of an inheritance.

For the charity-minded, federal IRS regulations provide an attractive tax-management option: A donor-advised charitable fund or a DAF.

Using DAF rules, you can contribute cash, securities or other items to a donor-advised fund administered by an IRS qualified organization operated for religious, charitable, educational, scientific or literary purposes, or for the prevention of cruelty to children or animals.

The real beauty of these funds comes from donating appreciated securities.
You get an immediate tax deduction for the total value of the stock that goes into the fund. The institution administering the fund gains full control of the stock donation and manages the account where it stays until you provide instructions for later distribution.

How donor-advised funds work:

Let’s say you inherit 50 shares of McDonald’s stock (worth about $4,750) from your grandmother, which she accumulated over 20 years of saving and investing. There’s no cost basis (how much she paid) for the stock. Instead of selling it and paying capital gains taxes on the sale, you can transfer the unsold stock into a donor-advised fund. Fund managers sell it and reinvest the cash according to your direction in one of several funds available within the fund program.

You get the upfront tax benefit (write off) in the form of a ($4,750) deduction in the current tax year, but you can accumulate money inside the fund provider for charitable distribution at your direction, later.

Vicki Fitzsimmons, a financial adviser with Edward Jones in Vancouver, Wash., says many of her clients like using donor-advised funds. “A donor-advised fund is a good alternative for smaller gifts and lets you contribute assets (cash, stocks or bonds) to a charity. And you can recommend how you want the assets distributed,” she said.

Many charitable organizations and large brokerage firms offer donor-advised funds within their investment programs: Foundations supporting universities, hospitals and community groups, for example. And it’s not just money or stocks that can go into these funds.

Charitable funds may accept real estate or interest in a limited partnership. The National Philanthropic Trust offers a comparison chart of donor-advised funds and private foundations that looks at fees, gift valuations, administrative responsibilities. (click here).

A few facts about charitable giving in America:
- 95 percent of American households give to charity.
- The average annual household contribution was $2,974 in 2013.
- In 2013, the majority of charitable dollars went to religion (31 percent); education (16 percent) and human services (12 percent). See National Philanthropic Trust. According to the trust, there were 201,631 donor-advised fund accounts in 2012. Total contributions that year: $13.9 billion.

In 2013, contributions climbed to $17.2 billion, up 23 percent.

Next step: Making a donation
When you are ready, you can recommend a grant to a qualified 501(c)3 nonprofit organization of your choice.  (No, the money can’t go to your financially strapped granddaughter.) Donor-advised fund managers make your distributions, which can be anonymous. No fuss, no muss and no record keeping since you’ve already taken the tax deduction.

Donor-advised funds are not just for the wealthy. You can start making contributions with as little as $1,000. There are no payout rules. The minimum donation amount could be as little as $50.

Learn about donor-advised funds

Before you dive into a donor-advised fund, do your homework. Ask about minimum contribution requirements and fund balances. Check up on fund administrative fees, which typically are 1 percent or less a year. Some funds have tiered fee schedules based on fund account totals. Look at fund investment options and donor services. Some funds offer workshops for potential donors. For more consider these resources:

“The Art of Planned Giving by Douglas White. ($8.17 at Barnes & Noble.)
“An Analysis of Charitable Giving and Donor-Advised Funds,” by Molly Sherlock ($13.99, Amazon).

Or visit these Web sites:
National Philanthropic Trust at www.npturst.org
Fidelity Charitable at www.fidelitycharitable.org
About Money at www.nonprofit.about.com
Oregon Community Foundation at www.oregoncf.org
Pros and cons of donor-advised funds, click here.
Vanguard Charitable, click here.

More pluses: With money in a donor advised fund you can save it up for a year when you don’t want to write checks out of your personal checking account but still want to maintain annual giving. And you can name a successor trustee for your account so the money doesn’t have to be immediately distributed if something happens to you.
Fund managers will do due diligence to make sure your donation is going to a legitimate qualified charity. So go ahead, write that check to the local food bank but consider building a donor-advised charitable fund that over time will grow (tax-free) for later distribution in a significant way.