With the holidays coming up, many people are already planning on how they want to make their charitable gifts before the end of the year. There is a a little known account called a Donor Advised Fund that offers an easy way to make your donation "early" and give the money away later.
First let's discuss how they work and why you may want to use one. When you set up a Donor Advised Fund, you receive an immediate tax deduction on the full amount you place in the fund. They are pretty easy to set up and require a relatively small initial donation of $5,000. Well, it's not that small but it is compared to other options like Private Foundations which have many more rules and restrictions and typical only make sense to start if you will be donating hundreds of thousands of dollars. Subsequent donations, after the initial funding, can be as low as $500 and there is no minimum required annual distribution, which there is with a private foundation.
Once funded you can give all or part of the total to various charitable causes of your choosing. If you don't want to donate all the money right away or aren't even sure who you want to donate it to the money that stays in the fund can be invested and grow tax-free, so there is even more money for charitable giving later on. Although this doesn't increase the size of your tax deduction (since it was already taken when the money was placed in the fund) it definitely increase the funds available for charities.
The ease of setting up, control, and flexibility are many of the reasons why contributions to Donor Advised Funds grew 14.1 percent or $19.6 billion, in 2014, bringing the funds’ total assets to $70.7 billion, according to statistics from the National Philanthropic Trust.
Future donations are very easy. Once the fund is established, you can make donations to the fund anytime. It's important to note that any money placed in a Donor Advised Fund is irrevocable, meaning you can't take it back, even though you retain the ability to coordinate the donations.
A neat feature of the fund is that you can make grants from the fund in the name of another person, someone you wish to honor or remember. For example, you could give part of the balance to a favorite charity of a loved one in their name, even though you already took the tax deduction on your personal tax return. It's also possible to set up a memorial fund in your own name that will keep on giving when you are gone.
Most people who set up Donor Advised Funds do so because they wish the fund to survive them, perhaps to be passed on to their children for future giving. In order to accomplish this it's important to set up the succession plan correctly when the fund is initially set up. You should name specific charities for granting at that time and decide how much and when to distribute funds. This is a good idea if you make donations to small charitable organizations who can't absorb all the funds at once. Alternatively, you can set it up to have all the money distributed in full to the charities of your choosing at the time of your death. Make sure that if you choose to pass the fund onto your children they are prepared to handle it according to your intentions. If you have more than one child, it is important to specify who is responsible for ultimately executing the donations. It is possible to name them as advisors on your account prior to your passing which might be a good idea to get them comfortable with how it works.
You also have the ability to set-up a separate account for each child and let them learn on their own how to make granting choices. This can be a great way to get your children involved in philanthropy early on. If you decide to go this route help your children make choices according to their own charitable causes. Give them control to choose the charities that they think are important and discuss it with them. This will get them comfortable with how things work.
If you are in a charitable mood, consider using a Donor Advised Fund rather then just making a straight donation. They are ideal if you need to make a donation before the end of the year but haven't determined who to actually give the money to yet. If you need help setting one up feel free to reach out to us. We never charge for the management of charitable funds.