By Carl M. Trevisan and Stephen M. Bearce
A donor-advised fund offers a middle ground between participating in simple “checkbook charity” and starting a nonprofit foundation.
Often considered smaller and nimbler cousins of private foundations, donor-advised funds offer many of the benefits of foundations, including the ability to:
- Involve multiple members of the family, friends, or other advisors
- Research potential recipients
- Recommend how funds are distributed
But, unlike foundations, donor-advised funds require less legal and financial paperwork, such as an annual tax filing that is subject to public inspection, regulatory requirements, and excise taxes.
How do you contribute?
Donor-advised funds allow you to contribute cash, stock, real estate, or other assets, such as business interests. These contributions can be bunched to combine multiple calendar years’ worth of gifts into one year, which may offer tax benefits if you are close to your standard deduction limit.
You may partner with a donor-advised fund sponsor or the sponsor may run your fund. A fund sponsor can be a financial institution or a community, educational, or religious institution. Grants may then be recommended by you or your designee to your charities of choice.
Rather than keeping track of gift receipts from multiple charities, a donor-advised fund serves as your single source for tax receipts and grant-recipient information. Keep in mind, your potential deduction is based on your contribution(s) to the fund itself, not the individual grants distributed from the fund.
More potential considerations for donors and recipients
Donor-advised funds are gaining popularity for other reasons, including:
Anonymity. When you give gifts to a charity through a private foundation, those gifts become public record through IRS form 990-PF. In contrast, you can choose to make your gifts from a donor-advised fund anonymously.
Recurring gifts. Many donor-advised funds have recurring gift options so you can optimize your giving in line with your giving strategy and the organization’s needs. If you had previously used credit cards to make recurring gifts, you can use tax-advantaged dollars and save a charity from costly credit card processing fees.
Noncash gifts. Appreciated stock, real estate, or collectibles are easier to handle for both the giver and the recipient through a donor-advised fund. This holds true even for highly liquid yet noncash assets like cryptocurrency.
While many charities may be unable to take noncash gifts given the level of complexity, donor-advised funds serve an important role to help charities benefit from the wealth accumulated in these illiquid assets.
Potential cautions
Of course, there are some potential cautions for anyone considering a gift to a donor-advised fund:
Irrevocable donations: The donor to the fund cannot withdraw their money for any reason once it’s gifted.
No legal requirement to make grants: There is no legal requirement to grant the money donated to the fund. This has been viewed as a criticism of donor-advised funds as grants may not be made at the time they are most needed.
Underlying costs/fees: Be aware of the administrative fees associated with the management of the donations as well as the investment options within the fund. Fees and investment options vary by provider.
Grant-making restrictions: Grants can be made only to certain eligible 501(c)(3) organizations that the IRS recognizes as public charities. These organizations cannot provide goods and services to the donor, such as tickets to a gala.
Potential tax advantages
Contributing to a donor-advised fund may bring tax advantages, such as:
- You may receive a tax deduction, the use of which is subject to your Adjusted Gross Income (AGI) limitations.
- There is no capital gains tax for highly appreciated assets when sold inside the donor-advised fund. The invested assets have the potential to grow tax-free, which could increase the eventual grant that you can make from the fund at a later date.
- Real estate gifts are valued at their current value, which may provide a bigger tax break if the property has appreciated, unlike similar donations to a private foundation that limit the deduction to the cost basis in the property.
If you’re considering using a donor-advised fund but are uncertain about whether it could be right for you, talk with your tax advisor and your financial advisor to help you decide.
*Donor-advised fund donations are irrevocable charitable gifts. The sponsoring organizations maintaining the fund have ultimate control over how the assets in the fund accounts are invested and distributed. Donor-advised funds donors do not receive investment returns. The amount ultimately available to the donor to make grant recommendations may be more or less than the donor contributions to the donor-advised fund. While annual giving is encouraged, the donor-advised fund should be viewed as a long-term philanthropic program. Tax benefits depend upon your individual circumstances. You should consult your tax advisor. While the operations of the donor-advised fund and pooled income funds are regulated by the Internal Revenue Service, they are not guaranteed or insured by the United States or any of its agencies or instrumentalities. Contributions are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Donor-advised funds are not registered under federal securities laws, pursuant to exemptions for charitable organizations.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
This article was written by/for Wells Fargo Advisors and provided courtesy of Carl M. Trevisan, Managing Director-Investments and Stephen M. Bearce, First Vice President- Investments in Alexandria, VA at 800-247-8602.
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