Is a Donor-Advised Fund Right for You?

Donate stock to charity through a donor-advised fund

Donor-Advised Funds

My wife and I just opened a donor-advised fund. If you’ve been a long time reader of the Dough Roller, you know from my 2007 investing update that we’ve been considering this alternative to charitable giving for a long time. Today we’ll look at why we made the move now. Let’s first start with just what a donor-advised fund is.

Donor-Advised Fund Basics

Run by companies like Vanguard and Fidelity, donor-advised funds allow organizations and individuals to set up the equivalent of a charitable foundation. You contribute cash or securities to the fund. The fund invests the capital based on your risk tolerance, and then will distribute the proceeds to charities of your choosing. Think of it as a middleman between you and the charity that invests the money until you’re ready to give it away.

Advantages of Donor-Advised Funds

Like most people, my wife and I have always made charitable contributions directly to the charity. We either write a check or use a rewards credit card (no reason not to earn 2% cash back). But this approach presents two problems.

First, at the end of the year we are always rushing to figure out where to make our final contributions. With the tax clock about to strike midnight on December 31st, sometimes we feel as if we are making these decisions to quickly. Call it procrastination, but it would be nice not to have to deal with tax deadline every year.

Second, we’d like to donate appreciate stock and mutual fund shares instead of cash. With appreciated securities, you get the full tax deduction based on the current value of the stock, but don’t have to pay any capital gains. The problem is that many of the charities we give to are small organizations that are net set up to accept stock.

A donor-advised fund can solve both of these hurdles. First, you get the tax benefit based on when you contribute to the fund, not when you direct the fund to distribute the money to a specific charity. This means that once you contribute to the fund, the money is no longer yours to control, and you can’t get it back. But you get the tax deduction immediately, even if you wait months or even years to make a distribution to a charity.

In addition, you can donate appreciated securities to a these funds. When you decide to make a distribution, the fund will sell the securities and distribute cash to the charity of your choice. You get the benefit of donating stock with significant capital gains, and the charity of your choice receives the cash from the sale.

The donation of appreciated securities is arguably the most significant advantage to donor-advised funds. If you plan to make contributions to a number of charities, trying to give stock directly to each charity would be an administrative nightmare. With these funds, you donate the securities once just to the fund, and they take care of the rest.

Disadvantages of Donor-Advised Funds

There are some potential disadvantages to these funds. First, as noted above, once you contribute the money, it’s out of your control forever. You can’t get it back. So you need to be certain of your contribution before you make it.

Second, there are fees associated with the administration of these funds. Vanguard, for example, charges an annual administrative fee of 0.6% for the first $500,000 in the fund, and 0.45% thereafter. These fees are in addition to the expense ratios you’ll pay for the mutual funds you invest the money while it sits in the fund.

Third, there is typically a minimum contribution to open an account. At Vanguard, you need $25,000 to open a donor-advised fund. At Fidelity the minimum initial contribution is $10,000.

Final Thoughts

They say there are only two things certain in life, death and taxes. I would add to that list changes in tax laws. As the United States struggles to address a mounting fiscal crisis, everything is on the table, including deductions for charitable contributions. While I don’t think such a change is imminent, it’s reasonably possible that many of not all tax deductions could be replaced by a much simplified tax code.

With a donor-advised fund, however, you can make the contributions now and enjoy an immediate tax deduction. And then you can take your time making grants to specific charities from the fund, regardless of what our fearless leaders decide to do with the tax code.

Published or Updated: April 21, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Walter says:

    Thanks for the great insight! One of the most valuable things about donor advised funds for us is accepting non liquid assets like stock and enabling givers to give more effectively! It’s exciting to help people give more!

    p.s. you wrote two ‘Disadvantages’ sections

    • Rob Berger says:

      Thanks for the p.s. Too funny. I must have been tired.

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