Due to family reasons and with the kind support of my employer, six months ago I decided to move from New York City to Atlanta. In addition to a myriad of life changes initiated by the move, it also required me to find a new home church. Because it has a significant effect on your position in a new community and is a place where new connections and associations are made, finding a new church is a big decision that often takes many Sunday visits and a significant amount of time to make.
My move also interrupted my charitable giving for the year. I have always given annually to my church, as many do, knowing that those contributions help the local underserved and needy. Now in a new community, I wanted to continue my charitable giving as I had planned even though I did not have a new church to give the funds to. For this reason, I started looking for a way that I could fulfill my giving plan for the year, while delaying the actual payments until I found new opportunities to fund.
Deduct now, give later
Charitable giving picks up at this time of year for both altruistic and practical reasons: unquestionably, the natural spirit of giving motivates people, but so do incentives to maximize tax deductions before the end of the year. That the Global Day of Giving is the Tuesday after Thanksgiving is no coincidence. It coincides with the fund drives of many charitable organizations that can take advantage of people’s holiday spirit of giving, while at the same time they are considering the need to reduce their tax burden.
What I learned from my search is that just because the year is ending doesn’t mean that people must make donations direct to charities today to receive the tax benefit. In fact, there is a way to make your charitable giving more organized and efficient, invest and grow your future charitable donations, and get and get a tax-benefit today.
Giving Account benefits
What I found was the Giving Fund, also known by its legal title of Donor-Advised Fund. I have been writing about investing for a long time and this was news to me, so I assume that there are other investors and benefactors that aren’t aware of it. It is the perfect solution because it provides the giver the following advantages:
- Provides donor with a qualified charitable donation for the tax year in which any donations are made. Most funds allow for donations in cash, stocks, bonds, real estate, or other valuable assets. Neither the donor or any charities are required to pay capital gains taxes on the appreciated value of any donated assets.
- As a Donor-Advised Fund, donors advise the fund on how to grant the money out to donor selected charities.
- Donations are invested based on the donor’s investment preferences, so contributions can grow, tax-free, while charities to support are selected over time.
- Some institutions allow advisers to have access to a donors Giving Account (which may be limited by account size), to either to choose and manage the investments, to select and fund charities, or both.
- Through succession planning most accounts can be transferred to maintain the donors mission and giving legacy into perpetuity, while in cases avoiding some common estate planning issues.
Customary fund requirements
Donor-advised funds are provided by a variety of investment organizations. There are many providers of giving accounts, the largest three being Fidelity Charitable, Schwab Charitable and Vanguard Charitable. These providers have some of the lowest administrative and fund level fees (typically 0.6% administration fee on top of product level investment management fees) and have easy and flexible terms for things like the minimum donation to initially setup a giving account, minimum future contributions, and the minimum grant that can be made from the account. While many require $25,000 as an initial contribution, minimum of $5,000 for ongoing contributions, and a minimum of $500 for grants, there are some that allow for as little as $5,000 to open an account, $250 contributions and a $50 minimum grant size.
Donor-advised funds are not limited to just individuals. Donors can include: corporations, partnerships, private foundations, trusts, and other charitable organizations.
Another common option that some donors take is to create a giving account with a community foundation or non-profit that provides similar services. Many use community foundations because they want to support the local community and because many of these groups work directly with specific local charities. In some cases, its more efficient to create an account with a larger institution and donate to community charities because many community foundations are not large institutions and they tend to have higher fees and less investment choices than some better funded alternatives.
Investment choices
The one drawback to the giving fund is that the investment choices for cash donations are often limited to products or investment pools offered by the account provider. However, in addition to giving financial advisers access to one’s giving account, some providers will allow advisers of large fund holders to actively manage their account. This allows some investors to widen their investment choices beyond the investment pools offered by the account provider and invest in vehicles such as hedge funds, private equity funds, mutual funds, treasuries and ETFs.
Although they may be well known to charities and philanthropists, the donor-advised fund is not something that most taxpayers are familiar with. During the holiday season, when people are receiving a multitude of solicitation calls and mass mailers from charities looking for donations, giving accounts can give people an alternative to be more selective about who to support in the future without giving away their tax benefit today.