Is a donor-advised fund right for you?
By Ryan DeMarco, CRPC™
Edward Jones Financial Advisor, 111 N. Main St., Bluffton, 567-226-4506
The answer depends on your personal situation, as donor-advised funds are not suitable for everyone. However, if you’re in a position to make larger charitable donations, you might want to at least see what this strategy has to offer.
Here’s how it works:
- Contribute to the fund. You can contribute to your Donor Advised Fund in cash or in marketable securities, which are assets that can be quickly converted into cash. If your contribution is tax deductible, you will get the deduction in the year you contribute to the fund. Of course, these contributions are still subject to IRS limits on charitable tax deductions and if you itemize your deductions. If you don’t typically give enough each year to itemize and plan for consistent charitable contributions, you may consider combining multiple years of planned giving into one contribution to the donor-advised fund and claiming a larger deduction that year. This decision can have a particularly big impact if you have years with a higher amount of income, with a higher tax rate. If you bring marketable securities, such as stocks and bonds, into the fund, a subsequent sale of the securities avoids capital gains taxes, thereby maximizing the impact of your contribution.
- Choose an investment. Typically, donor-advised funds offer several diverse, professionally managed portfolios where you can place your contributions. You will need to consider the level of investment risk to which your fund may be exposed. And assuming all conditions are met, any investment growth is not taxable to you, the donor-advised fund, or the charity that ultimately receives the grant, making your charitable donation even further away.
- Choose charities. You can choose grants for IRS-approved charities that you want to support. You decide when you want the money to be given and how it should be given. You are generally free to choose as many IRS-approved charities as you wish. And filing taxes is relatively easy – you don’t have to track receipts from every charity you support. Instead, you can simply keep receipts of your contributions to the fund.
Although donor-advised funds clearly offer some advantages, there are important trade-offs to consider. For one thing, your contributions are irrevocable, which means that once you put the money in the fund, you can’t access it for any reason other than charitable donations. And the investments you choose in your fund will involve some risk, as is the case with all investments. Additionally, donor-advised funds have investment management fees and other costs. So consider the impacts of these fees when deciding how you want to donate.
In any case, you should consult your tax and finance professionals before opening a donor-advised fund. And if the fund is part of your estate plans, you’ll also want to work with your legal advisor. But think about this philanthropic tool – it can help you do good while potentially benefiting your own long-term financial strategy.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, SIPC Member