Is A Donor-Advised Fund Right For You?

Michael Brauser BlogDonor-advised funds continue to grow for the sixth year in a row, with over 270,000 such funds managing nearly $80 billion in the U.S. alone.But what is a donor-advised fund and is it right for you? How does it compare to traditional philanthropy? Are there good tax reasons for favoring a donor-advised fund? And what about fees?

The Advantages

A donor-advised fund - an all of the major brokerage houses as well as others have in place donor-advised funds - lets you take the charitable tax deduction immediately, even if you wish to postpone your giving. And if you give appreciated securities, which makes up the bulk of donor-advised donations, you can deduct the full market value and avoid paying capital gains tax on the amount they've appreciated.A major advantage is that giving to an existing donor-advised fund is far simpler than setting up a private foundation, although you as a donor only advise the fund who should ultimately receive funds (all it's rare indeed that a fund will not honor the requests of its participants when it comes time to transfer funds to IRS certified 501(c)(3) organizations or their foreign counterparts.Another advantage is donor-advised funds have in place mechanisms and expertise for processing illiquid assets such as part ownership in a company, real estate, bitcoin, or art: few direct charities have such expertise.Also, the growth of DAF's over the past several years - $22.6 billion in 2015 alone, up 17% over 2014 - and increasing online giving apps and widgets lowers the barriers to this form of giving; the median balance for example of Fidelity's DAF accounts was $16,133 in 2013. In fact, unlike the minimum's for a private foundation managed by a financial institution, you can open a DAF account at Schwab or Fidelity for just $5,000.Another key advantage is while you make the donation to the DAF fund, you can defer deciding which charities you wish to advise receive those monies. In fact, according to one study, about 75% of those setting up DAFs choose to defer that decision.

The Disadvantages

A key consideration is that DAFs are usually either administered by national charities with a single recipient organization, community foundations that give to charities in a single geographical area, single-issue charities such as museums or financial institutions with a pre-approved list of charities. Odds are, you'll need several different DAF's to reach all of the charitable organizations you wish to give to.Another criticism of DAFs is that while the money is donated, it does not mean that it target organizations actually receive the money immediately. In fact, a recent study by the Economist concluded the single largest recipient of DAFs gifts was Fidelity Charitable, which last year surpassed the United Way to become America's biggest charity by donations from the public. And while current tax laws require foundations to disperse at least 5% of their assets each year, DAFs do not need to comply with this requirement.And then, there are fees. While the big three - Fidelity, Schwab and Vanguard - charge a maximum administrative fee of 0.6 percent, this is on top of the investments' management fees which can vary widely. Like all investment tools, it pays to study fee schedules carefully.All in all, DAFs are becoming an increasingly popular way for donors to manage their charitable giving, with major DAF funds reporting significant growth this past year. It might be time for you to consider them as opposed to more traditional direct donations or sometime cumbersome private foundations.

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