PhilMur's thoughts on biz/tech/money/life

Many people DESIRE to give.

Many people PLAN to give.

But many folks, despite meeting other financial goals in their life come year end, FAIL to meet charitable giving goals purely because they do not know what organization to give to.  As a result, they may simply scramble and write a check to the first charitable organization to call them the last week of December, or send a check to a national well-known organization that they trust.

Others without a giving plan may fail to give because they find themselves spending money they had initially intended to give to a charitable cause.  Or, maybe they have not spent it and intend it to be for giving, but by not giving in the current year they lose the tax deduction benefit until the year in which they make the gift.

Uncertainty about what organization to give to should not prevent individuals from setting aside the dollars that they intend to direct to charitable causes. The use of a donor-advised fund is, I believe, an excellent solution to the problems discussed here.

A donor-advised fund is a type of account that allows you to donate money into the fund NOW, and let the money sit in the fund (and even grow with interest) until you decide where to “advise” the fund managers to “direct” the funds.  Obviously, if you have a regular organization you are giving to then there’s no need to go through this process, just give directly to the organization.  But for periods of time when you wish to budget and set aside funds that will be given to an organization of your choosing LATER, the donor-advised fund is an excellent option.

Think of a donor-advised charitable fund as something more structured than off-the-cuff immediate giving, and yet less structured and complex than a foundation.  Many foundations, in fact, are beginning to transfer their assets into these charitable giving funds to reduce their administrative and record-keeping burden.

If you regularly give 100% of your planned charitable giving in the same year in which you set aside those funds, then a charitable gift fund may not be right for you.  As always, you should consult a financial planner or other professional that you hire to advise you based on your particular circumstances.  However, I hope this overview of donor-advised funds below provides a strong introduction to this financial tool.

There are several KEY ADVANTAGES of the use of donor-advised funds:

1. It gets the money out of your checking account – With a donor-advised fund, you can make periodic contributions if you wish.  Make your regular contributions correspond with your paycheck frequency, for example, if you want an easy way to budget your charitable giving.  By providing a way of getting the funds out of your checking account (despite not yet knowing where you will ultimately direct the funds), it helps you live up to your giving commitments and keeps you from spending the money before you realize it.

2. You realize a tax deduction in the current year – By “donating” the funds to the donor-advised fund in the current year, you are able to claim a charitable giving tax deduction, according to current IRS law, in the current year.

3. Give when, and to whom, as you feel is appropriate – By setting aside these funds and realizing the tax deductions on those donations now, you can be released from the pressure of deciding NOW how to give, and wait until you have identified the right organization, and timing, for your giving.

4. Most charitable funds allow you to invest your donor-advised funds until you are ready to recommend a grant – By investing the money inside your donor-advised fund, you should realize growth, exempt from taxes, of those funds until you are ready to instruct the charitable fund to issue a “grant” of funds.  Not only does this help to offset any effects of inflation on those monies, but the growth you experience in the fund through investment returns will also help to offset the minimal fees associated with operating such an account.

5. Donate non-cash assets. Not only can you transfer cash into a donor-advised account, but you can also transfer real estate, business interests, restricted securities, and other non-cash assets.

Here is the BASIC PROCESS of setting up and using a donor-advised fund:

STEP 1: SELECTING A DONOR-ADVISED FUND PROVIDER

There a number of charitable fund organizations that allow you to set up a donor-advised fund, including most of the major brokerage houses.  To illustrate differences between the features of various charitable fund organizations, I have created the chart below to demonstrate fee and minimums differences between three of the more popular charitable funds.  As you peruse the chart, the following definitions may be of help:

Minimum Initial Contribution: This is the minimum amount you can donate to open a fund.  If the amount is a bit steep for you, then one approach to take would be to, possibly in addition to your normal giving during this year, save up the amount over the course of this year that you plan to give NEXT year, but instead donate it to the fund at the very end of this year, thereby ensuring that you get the tax deduction in the current year.

Minimum Subsequent Contributions: This is the minimum amount of future donations to the fund.  If you find it takes a few months to save up $500 or $1,000 towards giving, then a charitable fund may not be appropriate for you if you struggle to keep those funds set aside while saving up for the minimum.

Minimum Grant Amount: This is the minimum amount of money you can request the charitable fund to “grant” on your behalf to a qualified organization of your choosing.

Annual Fee: Most of the charitable fund organizations charge a fee on your fund balance, on a sliding scale basis that typically DECREASES as the size of your balance grows.  Most charitable funds assess 1/12th of this fee on a monthly basis based on the average fund balance during the month.  For example, if your fund charges 0.60% on the first $500,000 in your fund, and you have $25,000 in your fund throughout an entire month, the fee charged against your fund at the end of the month would be 0.05% of $25,000 (1/12th of 0.60%), or $12.50 for that month.  Also, see Step #4 below for a further discussion on investing inside of your charitable fund. You may also wish to question the organization you are considering selecting to determine if there are other fees related to grant distributions, etc.

A COMPARISON CHART OF 3 CHARITABLE FUND ORGANIZATIONS

In our family we decided to select the Schwab Charitable Fund for a number of reasons – we liked the ability to invest the funds in our donor-advised account, their fee was comparable to other organizations in the market, and also for the fact that we had other IRA’s and brokerage accounts with Charles Schwab and so it made for an easier logistical setup for fund donation, etc.

STEP 2: SETTING UP YOUR DONOR-ADVISED ACCOUNT

Once you have selected the charitable fund organization you wish to use, simply download the application from their website, complete the application, and submit to the organization with your initial contribution.  NOTE: It is important to get more information from your charitable fund about their process of approving charities before you commit to opening a fund; see Step #4 below.

Remember, any money you donate to the account is deductible in the year of the gift.  Also, remember that once you have transferred money to the donor-advised account, you no longer have rights to the funds — you have given those funds away for all intents and purposes, even though you retain the ability to invest the funds and direct the funds to qualified organizations, as you wish.

Pretty straightforward, right?

STEP 3: MAKE SUBSEQUENT DONATIONS TO YOUR DONOR-ADVISED ACCOUNT AS YOU WISH

As you wish and have funds to do so, you can make subsequent donations to your donor-advised account any time you wish, as long as that additional gift meets the minimum required by the charitable fund organization you are using.

Your fund organization will very likely allow you to set up automated gifts through automatic transfers from your checking or brokerage account.  You can also always send in individuals gifts however often you wish.  However much and howevre often you contribute to this account, doing so is a key practice in reaching your long-time giving goals.

STEP 4: INVEST THE FUNDS INSIDE OF YOUR DONOR-ADVISED ACCOUNT AS YOU WISH

As described earlier, most charitable funds will let you invest the funds inside of the donor-advised account in various mutual funds.

Many charitable funds allow you to invest the donated dollars that are sitting in your donor-advised fund; these monies can be invested in mutual funds with varying levels of risk and expected return.  These individual investments within the fund will carry fees with them, like mutual funds or investments in any brokerage account would, so make sure to keep that in mind.

As described earlier, investing these funds will help to offset any effects of inflation on those monies, and the growth you experience in the fund through investment returns will also help to offset the minimal fees associated with operating such an account.

If you do not anticipate holding the monies in the fund long and expect to give them quickly, then simply keep them in “cash” form inside the fund and avoid these investment fees.  You will of course be also foregoing any investment returns that may have occurred during that time.

STEP 5: RECOMMEND “GRANTS” TO BE MADE OUT OF YOUR DONOR-ADVISED ACCOUNT

When you wish to give to an organization, you will simply notify your charitable fund either by completing a form online or submitting a hard copy form.  Most national organizations will already be on the charitable funds “approved list of charities”.  You should expect to be able to give funds to any 501(c)(3) non-profit organization.  Additionally you can give to educational institutions and religious organizations, even though many religious organizations may have a “de facto” non-profit status though they are not all required to have filed for 501(c)(3) registration.  It is important to get more information from your charitable fund about their process of approving charities before you commit to opening a fund.

Once you “recommend” that your charitable fund send a “grant” to a qualified organization, you can expect them to do so quickly, within a matter of days.  Remember that even if the charitable organization that is given to erroneously claims your gift is tax-deductible and includes that grant in their statement of your giving that they provide you at the end of the year, that is not actually possible.  You received a tax deduction once when you donated the funds to your donor-advised charitable fund; you cannot receive a second tax deduction when the charitable fund grants the charitable organization some of those dollars.

CONCLUSION

Giving, like so much else is life, is often simply a matter of developing a plan and executing on that plan.

Donor-advised accounts offer an easy, accessible way for individuals, families, and even corporations to budget their giving on an ongoing basis, ensuring that tax benefits are accelerated and most importantly ensuring the funds are directed out of one’s hands and into an account that can only be used to later give those funds in a charitable way.

The issue of “What Organization Should I Give To?” is ALSO an important question, but also very different from one person or family to another, and is too big of a question to be covered here in this blog post.

It is my hope that readers of this post now have a better understanding of an innovative way of executing their giving plan through the use of donor-advised charitable funds.