When it comes to charitable giving, many individuals want to make a meaningful impact with the money and assets at their disposal. A donor-advised fund is one way that you can make strategic charitable donations to impact your local community or even the world at large. They come with an array of benefits, but they will not necessarily be for everyone.
What are the pros and cons of donor-advised funds? This guide walks you through everything you need to know to decide if this giving strategy suits your financial portfolio.
3 Donor-Advised Fund Pros
The good news is that there are plenty of beneficial reasons you might turn to a donor-advised fund to make a difference in the world. Here are the top benefits of a DAF for your giving.
Immediate Tax Deduction
Some people know they want to give to charity, but are uncertain where to send their gift for the most significant impact. Maybe you’re debating between a few different causes or still need time to properly vet which charities will spend your donation efficiently and responsibly.
A donor-advised fund allows you to make contributions now and allocate them to a specific charity (or charities) months or even years down the road. The benefit of doing this now is that you can take an immediate tax deduction for cash and assets placed in a DAF.
The specific rules regarding tax deductions vary based on the type of asset donated and can range from a maximum of thirty to sixty percent of your adjusted gross income.
Five-Year Tax Deduction
If you want to give more than what is allotted in the tax deductions for a given year, there is good news: you can carry those donations forward for up to five years. This allows you to contribute as much as you want without losing out on the benefits of reducing taxable income. It might not immediately impact you, but it is powerful for minimizing income taxes in the years ahead.
This is often called charitable bundling and can be a powerful tool to minimize income taxes.
Tax-Free Growth
Because you do not have to name any charities upfront, the money and assets you contribute to your donor-advised fund will have more time to grow. More importantly, those assets grow tax-free until you make a charitable contribution. If you were to retain the assets as part of your estate, it might net bigger taxes that can minimize your gift.
3 Donor-Advised Fund Cons
Of course, not everything about donor-advised funds is going to be positive. There are some key restrictions to giving with a DAF, which you should consider before contributing assets to one.
Loss of Control Over Your Assets
A donor-advised fund does not function like a certificate of deposit or other investment strategies. In other words, once you contribute to a DAF, those assets are no longer part of your estate. You lose ownership over them, so be sure you can afford to part with your cash or assets before allocating them to charitable giving.
Administrative Fees Cut Donations
Donor-advised funds will have administrative costs that should be considered carefully before you make a hefty investment. The professional managing your fund will need to be compensated for their time, and they often take a percentage of the assets contained within your fund. Be sure to ask questions about fees upfront to maximize your giving.
Must Give to an Approved Organization
One more restriction on DAF donations is that they must go to approved organizations. Any organization you want to donate to must be recognized as a charitable organization by the IRS.
It can be either a private foundation or a public charity, but not all work will be eligible for a grant. If you want to give to a specific local charity that may not have IRS paperwork behind it, your charitable goals could be limited.
Alternatives to a Donor-Advised Fund
Of course, a donor-advised fund might not be for everyone. An alternative to a DAF is a charitable remainder trust. This allows you to reduce your estate and place it in a trust that has many of the same benefits as a donor-advised fund. It creates a tax-deductible opportunity to give, allows the assets to grow tax-free, and provides for a charity or charities of your choice.
However, there are additional benefits to a charitable remainder trust. Namely, you can name a beneficiary who will draw income from the trust for a period or a lifetime. At the end of the trust, the remainder (or a minimum of 10 percent) is given to the charities designated at the start of the trust. Both have excellent tax benefits here and now, reducing your taxable estate.
One strategy for managing a charitable remainder trust is to name a donor-advised fund as the beneficiary on your CRT. This gives you more freedom and control over where your donations go if you are unsure where you want to donate right away. In other words, the two do not have to be mutually exclusive; they actually pair up quite nicely.
Magellan Helps You Give More
If a donor-advised fund or a charitable remainder trust is the right tool for you to leverage your cash and assets toward charitable giving, Magellan can help. We provide for all your needs with comprehensive estate, financial, legal, and tax planning all under one roof. Think of us as your one-stop shop for everything related to making your long-term goals a reality.
Reach out to us today to learn more about our services and to start the process of creating your own charitable remainder trust!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.