Donor Advised Funds go Mainstream

/ October 22, 2015

bouquet of flowers - iStockIn the four years since this site last addressed Donor Advised Funds, this tax planning tool has grown significantly in popularity. Between 2011 and 2013, total assets in Donor Advised Funds grew from $38 billion to almost $54 billion, and the trend doesn’t seem to show any signs of slowing down. While many advisors consider Donor Advised Funds to be tools for only their wealthier clients, trends in the Donor Advised Fund market make these charitable accounts a powerful vehicle for many philanthropically minded individuals and their families.

National Charities Open the Door

Much of the growth of Donor Advised Funds has been at the so-called National Charities. These charitable organizations, often founded by financial services firms, provide an efficient and low cost way for donors to streamline their giving. The largest of the National Charities, the Fidelity Charitable Gift Fund, granted over $1.5 billion in the first half of 2015 alone. National Charities typically have the lowest costs and minimum account sizes, although some National Charities affiliated with banks or brokerages may have significantly higher fees, so it’s important to read the fine print.

Community Foundations Add Value

As the National Charities have lowered the threshold for Donor Advised Funds, Community Foundations have in many areas expanded their offerings of value added services and advice for their Donor Advised Fund clients.  At the Minneapolis Foundation, each Donor Advised Fund is assigned a Philanthropic Advisor personally responsible for guiding donors in their giving. The Foundation has also developed a suite of tools, resources, and experiences—the Family Philanthropy Resource Center—to help donors give as a family. While Community Foundations generally have higher fees and minimums than National Charities, many donors find that working with an active partner helps them give more confidently and is well worth the marginally higher cost.

Not Just for the Wealthiest Donors

As Donor Advised Funds have grown in popularity, the barriers to entry have gotten lower. In fact, almost any donor who itemizes their income tax deductions, gives at least a few thousand dollars per year, and owns appreciated stock in their portfolio can benefit from the significant tax advantages of this tool.

  • Making a single gift to a Donor Advised Fund allows a donor to take a single itemized deduction on their tax return, instead of needing to collect and save potentially dozens of tax receipts.
  • Donor Advised Funds can be started with as little as $5,000. For donors giving larger amounts, there are many options providing more services and advice.
  • Donor Advised Fund sponsors make it easy to contribute appreciated stock, avoiding capital gains tax on its sale and turning the stock into cash that can be distributed to multiple charities. This benefit is especially useful to donors who wish to support small organizations that are not well equipped to accept gifts of stock.
  • Making gifts to charity from a Donor Advised Fund can be more efficient for the beneficiary: for example, charities often lose up to 4% of credit card gifts in transaction fees. A single annual gift from a Donor Advised Fund can result in more money going to a charity’s mission, and less to overhead.

In much the same way that firms like Schwab and Vanguard brought more sophisticated investment options to the masses, National Charities have opened to the door to Donor Advised Funds to a segment of the population that might never before have considered themselves “philanthropists”. At the same time, much as higher‑end financial firms have refocused on providing holistic, value added wealth management to their wealthier clients, Community Foundations have also positioned themselves as philanthropic advisors to those looking to make a bigger impact on society.

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