Ring In the Holiday Season With Charitable Giving

by Brian Pirri and Glenn DiBenedetto | Nov 20, 2019

The benefits of donor-advised funds for long-term philanthropy

As December approaches, it’s time to start thinking about decking the halls, piling gifts under the tree for family and friends, and giving back to your favorite charities. Americans gave over $427 billion to U.S. charities in 2018, according to “Giving USA 2019.” When considering how to use your charitable funds this year, there are a number of vehicles to consider. While your decision will ultimately depend on your income, personal estate and philanthropic goals, our team at New England Investment & Retirement Group (NEIRG) often recommends using a donor-advised fund, which offers an easy way to make significant charitable gifts over a long period of time.

What is a donor-advised fund?

A donor-advised fund is an agreement between a donor and host organization that gives the donor the right to advise the fund on how the donor’s contributions will be invested and how grants to charities will be made. Donor-advised fund accounts are easy to create. After establishing the account and recommending an investment strategy, the donor makes a required minimum contribution of assets, which may include cash, marketable securities and other assets. During life, the donor (or the donor’s designee) can make ongoing, non-binding recommendations to the fund as to the amount, timing and charitable recipients of grants from the fund. Additionally, the donor can offer advice to the fund regarding how contributions should be invested.

Donor-advised funds vs. private foundations

In addition to donor-advised funds, private foundations are another vehicle commonly used for charitable giving. While both options allow a person to take deductions now and decide later on the recipient of a gift, they do have a few notable differences.

First, a donor-advised fund usually receives contributions from many unrelated donors (though donors’ accounts are kept separate), while a private foundation is typically funded by one source. Additionally, donors to a donor-advised fund may only offer advice regarding grants and investments, while private foundations offer the donor exclusive control and direction over grants and investments.

However, federal income tax treatment tends to be more favorable for a donation to a donor-advised fund than for a donation to a private foundation. Because contributions to a donor-advised fund are considered gifts to a “public charity,” they may benefit from a greater income tax deduction than contributions to a private foundation. Donors also receive the tax deduction in the same year the contribution is made.

Furthermore, private foundations are required to distribute a minimum of 5% of their assets each year. Donor-advised funds have no such minimum distribution requirements and donors may be allowed to let their accounts build up tax free for many years, with distribution occurring only upon a specified date or the occurrence of a specified event.

Lastly, donor-advised funds do not need to fulfill many of the reporting and filing requirements that are imposed on private foundations. Because the fund handles any legal, administrative and filing requirements (including tax returns), the donor is completely freed from these responsibilities. In addition, since separate accounts within a donor-advised fund are administered as part of the larger host organization, the administrative costs borne by the donor are generally lower than those incurred by a private foundation.

The holiday season is an important time to give back to your community, whether through baking cookies for an elderly neighbor, donating winter clothes to children in need or giving money to your favorite charity. No matter your chosen charity, take the time to consult with your financial advisor and ensure that you are using the appropriate vehicle to make the most of your donation this year.

Prepared by Broadridge Investor Communication Solutions, Inc.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

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