When to use donor-advised funds
Making one large donation to a charity is relatively simple, and can often be tax-effective. But what if a client wants to give $1,000 to 10 charities? Or $500 to 20 charities? The paperwork can get more complicated.
One solution is to make a single charitable gift of assets to a donor advised fund; many organizations and financial firms sponsor such an entity. Then the donor can have the fund send money to as many charities as the client likes.
The latest report from the National Philanthropic Trust found that donor-advised fund assets reached $45.35 billion in 2012, up 19% from $38.14 billion in 2011.
"We use DAFs with a number of clients," says Mark Wilson, chief investment officer at the Tarbox Group, a wealth management firm in Newport Beach, Calif. "Almost all DAF funding has been through highly appreciated assets, after we've helped to identify which security or securities to gift.
"Some of our clients use a DAF as a flow-through mechanism for their annual charitable gifting," he adds. "They make an annual contribution to the DAF, then arrange for grants [from the fund] throughout the year, typically in small increments."
Such funds vary operationally. Many have minimum gifts of $5,000, but not all do. Fees vary among the funds, ranging down from 1% of assets per year, with lower charges for large accounts.
Charles Haines Jr., CEO and president at Kinsight, family wealth advisors in Birmingham, Ala., is so impressed by the advantages of donor-advised funds that he and his wife are using one for their personal donations. "We are going to be making a substantial gift down the road," he says, "but we wanted to spread out the deductions and savings planning over a number of years. We also wanted the DAF to do all the accounting and mailing for our various donations, instead of having to do it ourselves."
According to Haines, they chose their fund -- the National Christian Foundation Fund -- for a variety of reasons.
"The technology at this DAF is among the best, if not the best, that I have seen," he says. "This DAF also has the ability to check on organizations to see if there are any elements that are antithetical to our faith. We can still give to non-religious entities through this DAF, but we don't want to unwittingly support an organization whose activities may be counter to our values."
Wilson says that some of his clients have made a large tax-deductible gift to a donor-advised fund to help offset a particularly large tax burden in a given year.
Charitable grants then follow over a number of years.
"DAFs solve a number of issues," says Wilson. "Tax reporting is simplified, as there is one gift to track. Small gifting is easier -- $50 grants often are permitted -- and the charities receive cash instead of securities, which makes them happy."
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.