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How to Simplify Your Charitable Giving

Clients frequently ask us for ways to make a bigger impact with their charitable donations while simplifying the giving process. One of the best ways to accomplish this is by using a donor-advised fund.

What is a donor-advised fund?

A donor-advised fund is a special account that allows you to make contributions of cash, securities (like stocks or mutual funds) or other appreciated illiquid assets that you’ve held for at least one year. You can then choose to either invest the account for longer term growth for future charitable giving, or you can grant gifts to charities from the account right away.

The money that you contribute to the account is eligible for a current-year tax deduction if you itemize, and the administrator of the donor-advised fund will send you a single, simple tax receipt at year-end for all the contributions you’ve made throughout the year.

Once you’ve contributed to the account, you can then recommend grants to the qualified U.S. charities you’d like to support and the donor-advised fund issues the checks. The gifts can be given now or at any point in the future, but remember, you get the benefit of the tax deduction in the current tax year.

What are the advantages of donor-advised funds?

Simple Tax Reporting: For many people who give to charities, their giving is rarely limited to one or two organizations. For example, you might give to your church, the local food bank, a veterans’ organization, a foundation that supports cancer research or any other number of causes. If you give to those charities directly, you have to collect tax receipts from each one individually and remember to include them in your return at year end. A donor-advised fund consolidates the tax reporting into one simple form regardless of the number of grants you recommend from the account, whether you make a handful of grants or dozens of them.

Ability to Accept Institutional Mutual Funds: Many of our clients hold shares of highly-appreciated institutional mutual funds, such as the funds managed by Dimensional Fund Advisors (DFA). It is typically not possible to transfer these funds directly to a charity since the charity may not meet the fund’s requirements to hold the security. However, a donor-advised fund may be able to accept these institutional investments with no restrictions, opening the range of possible securities you can give. The benefit of donating appreciated securities is that you can deduct the full fair market value of the gift without realizing any capital gains.

Ability to Accept Illiquid Assets: Some donor-advised funds can accept illiquid assets such as real estate and privately owned equity. I heard recently of a donation of a very large amount of fill dirt to a donor-advised fund! Naturally, these transactions are a bit more complicated, but knowing that this is a possible option may open charitable giving opportunities you may not have even known existed.

Anonymous Giving: Anonymous giving can be challenging when trying to give directly to a charity. The donor-advised fund allows you to either disclose your name to the charity or give a gift anonymously.

Creating a Charitable Legacy: You can name a family member as a successor to manage the account in the event of your death, which ensures your charitable giving can extend beyond your lifetime. Assuming you have already provided for the well-being of your heirs, donor-advised funds can even be named the beneficiaries of life insurance policies or retirement accounts.

Of course, the donor-advised fund is not the only vehicle available for charitable giving, and sometimes it makes sense to use more complex techniques depending on what you’re looking to accomplish. But for most of us, using a donor-advised fund may prove to be the simplest way to make a big impact with our charitable giving. Please contact us if you have questions about how Financial Synergies can help create a customized charitable giving game plan for you.

Bryan Zschiesche

Bryan is a CERTIFIED FINANCIAL PLANNER™ and Senior Financial Advisor. He uses his expertise to develop investment strategies to protect and grow clients’ retirement savings. Bryan is a proponent of Elegant Simplicity, the idea that we can work through complex issues surrounding a financial problem and arrive at a sophisticated but simple solution.   Read Bryan’s Profile HereRead More Articles by Bryan

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