Americans are always very charitable. This year you may hear about the boom in donor-advised funds, which are charitable giving tools that allow you to take tax advantages now but wait with disbursements.
A recent report from CNN Money, "Everything You Need to Know about Giving to Charity Through a Donor-Advised Fund," says that assets in donor-advised funds increased 25% in 2014 to $70.7 billion. Charitable gifts from the funds grew 27% to $12.5 billion.
Is this right for you? It depends on a few key issues to consider before you decide how to give.
How Do They Work: Donor-advised funds are philanthropic vehicles that are created by a public charity. The funds are promoted to donors as tax management strategies that allow large, immediate tax deductions in good times and then disburse the money later. The funds are managed by nonprofit entities, typically a charitable organization under a financial services company or a local community foundation. This money grows tax-free while it's in the fund, but you will have to pay administrative fees in addition to any investment costs. Usually, the more money you have in the fund, the lower the fees.
Who Should Utilize Them: The upfront tax deduction makes these funds especially interesting if you see a bump in your income, such as an inheritance or business sale proceeds. Since this type of contribution is deemed a gift to a 501(c)(3) public charity, you are permitted to deduct up to 50% of your adjusted gross income (AGI) for cash gifts—and 30% for donated appreciated securities—to maximize your tax benefit. This can also be a wise move for those interested in donating assets other than cash to a charity. Giving the appreciated assets of stock or complex holdings like real estate or small business shares to a donor-advised fund lets you avoid capital gains tax. Another potential advantage is that if you prefer to remain unnamed, donor-advised funds often allow gifts to be anonymous.
When to Not to Use: This type of strategy is best suited for wealthier donors. If you donate less than a few thousand dollars each year, you may want to just contribute directly to your favorite charities. It won't be worth paying the administrative fees, and most funds require a higher minimum contribution and restrictions on follow-on donations and grant size.
There are other limitations, such not receiving goods or services in exchange for your donation. That creates issues with the IRS since you've already received a tax deduction on the full amount of your donation. Taking advantage of donor perks, which reduce your charitable donation by what it costs the organization to offer such rewards, would be like cheating on your taxes. If you want to keep the money in the fund for several years, remember that your investment choices are usually limited to those offered by the company with which you opened your account. In addition, donor-advised funds can only make grants to other public charities that are in good standing with the IRS, so you can't make gifts to split-interest trusts like a charitable remainder or charitable lead trust.
Lastly, donors should know that donor-advised fund operators aren't legally required to follow the donor's wishes about how to invest the money or where grants should be made. Although many do, you don't have absolute control over the fund.
Reference: CNN Money (December 22, 2015) "Everything You Need to Know About Giving to Charity through a Donor-Advised Fund"