Understanding donor-advised fund basics

Between 2017 and 2021, contributions to donor-advised funds went from $31.38 billion to $72.67 billion and grants from these funds increased from $19.72 billion to $45.74 billion. That’s according to the 2022 Donor Advised Fund Report from the National Philanthropic Trust.

So why are donor-advised alternatives proving so attractive? The answer may be in streamlining the way donors can pursue their philanthropic goals.

 

How donor-advised funds work

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 to the fund, not the future 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 be anonymous.

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 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 downsides

Of course there are some potential downsides about which anyone considering a donor-advised fund should be aware:

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 to worthy causes when 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.

Grant making restrictions: Grants can only be made to certain eligible 501(c)(3) organizations that the IRS recognizes as public charities. These organizations cannot provide goods and services, such as tickets to a gala, nor can the grants satisfy personal pledges.

 

Potential tax advantages

Contributing to a donor-advised fund may bring tax advantages, such as:

• You may receive a tax deduction 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, a professional financial advisor may help you decide.

 

Our firm is not a tax or legal advisor.

Donations to a donor-advised fund 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 fund 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 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.

 

This article was written by Wells Fargo Advisors Financial Network and provided courtesy of FCS Private Wealth Management.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC, Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

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