Should you be using a donor advised fund?
I love donor-advised funds. This remarkable financial tool has been around since the 1930’s, but their popularity has soared in recent years. If you are new to donor-advised funds, I encourage you to learn more about them.
A donor-advised fund (DAF) is an account held in your name at a sponsoring non-profit organization from which you can direct further charitable gifts. Your donor-advised fund operates much like your own private foundation, but at a fraction of the cost and without the legal and compliance hassles that come with private foundations.
Donor-advised funds provide donors with tremendous flexibility in the timing of their gifts. For example, if you have a large taxable event in a given year and wish to offset it with a charitable contribution, you can make a tax-deductible donation to the DAF in that year and then dole out your donations to your target charities in the years that follow. This kind of “timed-release” giving can help your giving have greater impact than a one-time gift might have.
On a more personal level, DAFs can help families introduce their children to charitable giving. Showing our children how to live with an attitude of abundance and appropriate generosity is one of the greatest gifts we can give them. In my experience, there is no better way to do this than to engage with them in acts of intentional philanthropy.
Some donor-advised funds are huge. For example, the Fidelity Investments Charitable Gift Fund (a DAF associated with Fidelity Investments), processed over 1.5 million grants last year totaling over $7 billion in charitable gifts. That is giving on an epic scale.
While big numbers are impressive, I prefer a more local touch. In that regard, you cannot beat our very own Community Foundation for Monterey County. Not only do they provide excellent service to donors, but they have in-depth understanding of the needs of our community.
You can open a donor-advised fund at the Community Foundation with as little as $5,000. There are no start-up costs, but there is an annual management fee which covers expenses related to fund administration, including accounting, tax filing, grant administration, and regulatory compliance.
When you set up your fund, the funds will be invested in the Community Foundation’s investment pool which is overseen by what is arguably one of the strongest investment committees in the country. If you already have an investment manager and if your fund is of a certain size, you can opt to have your manager continue to manage the assets under the Community Foundation’s Donor-Recommended Investment Manager program.
Once your fund is established, the Community Foundation will provide you with a philanthropic services officer who will help you get the most out of your relationship with the Community Foundation. They will review your fund with you on an annual basis to make sure it is meeting your expectations and they will help you with the grant-making process.
The Community Foundation also provides online access to check your fund balance and make grant recommendations. And if you are new to philanthropy, they can help you research grant ideas and strategize on how to use your donor-advised fund to best accomplish your philanthropic goals.
Keep in mind that the money you contribute to your donor-advised fund is an irrevocable gift to the sponsoring charity like the Community Foundation. Though you retain advisory privileges with respect to the distribution of funds and the investment assets in the account, the DAF sponsor is not obligated to follow your advice. In practice, however, sponsors are anxious to help their donors. If yours pushes back on a recommended grant, it is likely because the target of your grant does not meet IRS requirements or there is some other compliance issue.
You should also be aware that donor-advised funds cannot receive Qualified Charitable Distributions from an IRA. If you wish to make direct charitable gifts from your IRA, your advisor can help you find a different solution.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.