In A Christmas Carol, Charles Dickens has a scene where two charity workers raising funds for the poor approach Ebenezer Scrooge on Christmas Eve.
“. . . What shall I put you down for?”
“Nothing!” Scrooge replied.
“You wish to be anonymous?”
“I wish to be left alone,” said Scrooge.
Scrooge may not be alone in his desire to be left alone. With 60% of Americans supporting presidential candidates’ proposals for wealth taxes, financial transaction taxes, higher capital gains tax rates, and increases in income taxes, many of our affluent neighbors are just not feeling the love this Christmas.
Nevertheless, there are still millions more who want to give. Charitable giving, though, can be more complicated than it was in Scrooge’s time. For example:
• Are you bunching your itemized deductions into every other year and would like to give a substantial amount to charities this year, but you haven’t had time to research which charity you want to support or you want to spread the giving out over time as opposed to giving it all this month?
• Do you support a number of charities and would like to support even more, but find the IRS requirements for documenting your gifts to be burdensome?
• Would you like to set aside a sum of money for your favorite charities that could generate an annual income forever, but forming a foundation or charitable trust is beyond your reach?
All the above are possible with a donor-advised fund.
Let’s say you wanted to give small amounts to fifty different charities. Rather than write fifty checks and obtain fifty receipts, you can make one gift to the fund, which distributes the money to the fifty charities. You only have to provide one receipt to the IRS.
You can also make a charitable gift to the donor-advised fund that qualifies as a deduction on your 2019 tax return, but you can delay the distribution of the funds until sometime in the future. This gives you time to explore the various causes you may want to support.
What really sets a donor-advised fund apart from other types of charitable giving is that you can decide how your donations are used, much as you would if you set up your own foundation. You can even create either an endowed or a nonpermanent fund for a particular purpose, such as a specifically-designated scholarship fund in memory of a loved one.
Examples of donor-advised funds are the Black Hills Area Community Foundation and the South Dakota Community Foundation. The BHACF & SDCF support scores of local charities and special projects. However, almost all financial institutions like Fidelity, TD Ameritrade, and Schwab have relationships with donor-advised funds.
While DAFs create an easy-to-establish, low-cost, flexible vehicle for charitable giving as an alternative to an expensive and complex private foundation, they are not hassle-free or without costs. Many charge a combination of fixed quarterly fees and an annual percentage of the undistributed funds. There is also a reasonable amount of administrative work involved. One DAF that I use assesses a penalty of $500 if the account is closed in under a year. They work best when a person anticipates significant contributions and a long-term giving plan.
Every donor-advised fund has different charities, minimums, processes, and costs, so it’s important to do your homework. Research whether the fund approves of the charities you want to support, as well as the costs involved.
A donor advised fund may be a good way to take a large deduction this year, reduce the administrative hassles and costs of setting up a foundation, and still give to causes you choose to support.