Insights & News

December 2015
Estate Planning

Donor-Advised Funds

The Zuckerbergs’ recent pledge of 99% of their Facebook shares during their lifetime has brought a renewed spotlight to making a commitment to philanthropic giving that spans multiple years. While we are still working, many of us do not have sufficient time to research and vet charities throughout the year so we end up scrambling as the deadline for charitable contributions approaches. Establishing a donor-advised fund can be an effective vehicle for your charitable dollars while allowing you to delay the decision making process until you have more time to determine which charities you would like to be the beneficiaries of your charitable dollars.

A donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501c(3) organization, referred to as the sponsoring organization. Each account is comprised of the contributions made by individual donors. Once the donor makes the contribution, the sponsoring organization has legal control over it. However, the donor or donor’s representative retains the right to determine how the funds are distributed and how the assets are invested in the account. Sponsoring organizations can be community foundations or the charitable arm of large custodians such as Charles Schwab or Fidelity. Donor-advised funds can be setup to operate very similar to private foundations, bringing the power of creating a legacy of charitable giving to anyone with charitable intent.

One of the key advantages of a donor-advised fund is you do not need to wait until the funds are distributed in order to claim a tax deduction. The tax deduction is taken in the year contributions are made to the donor-advised fund. This feature allows you to receive the charitable deduction during your peak earning years, when you need it the most, and delay the decision making process for the distribution of funds until after retirement, when you have more time and are most likely in a lower tax bracket.

Recent research has suggested that charitable giving in retirement may be a key factor to a successful retirement. A recent study by Bank of America Merrill Lynch, “Giving in Retirement: America’s Longevity Bonus,” uncovered some interesting findings about retirement and charitable giving. The survey noted that 65% of the retirees said that retirement is the best time to give back and seven in ten retirees (69%) said being generous is an important source of happiness in their retirement years. The survey also highlighted that the top motivator for charitable giving among retirees is “making a difference in the lives of others.” This factor was five times more important than getting the tax deduction. In addition, “retirees who give are more likely than those who don’t to say they have a strong sense of purpose, high self-esteem, and are happy and healthy.” Finally, the study highlighted that retirees ended up missing their “social connections” the most after retirement even though they thought it would be a “reliable income” that would be hardest to give up.

Establishing a multi-year charitable gifting plan during your pre-retirement years can be a win-win situation. It provides a tax deduction during the years when it is most advantageous while building a charitable fund to be distributed during your retirement that can help build and establish new social connections.

Another advantage of donor-advised funds is the ability to mimic a private foundation and use it to pass on our values to our children and grandchildren while teaching them the importance of giving back to their communities. Many donor-advised funds will allow you, as the donor, to create a family board, appoint members, and delegate the decision making process to the board members. As the donor, you can establish guidelines and rules for the distribution of funds. As a result, funds are distributed to organizations that meet your values but leaves the final decision to the board members, allowing your family members to learn the value and impact of giving back while creating a legacy that can last past your lifetime. Board members can be required to research individual charities and present their findings and recommendations to either you or a separate advisory board before approval is granted to distribute funds to their selected charity.

Other key benefits of donor-advised funds include: the ability to gift appreciated securities or other high value and complex assets, such as art collections; creating a legacy; separating tax planning from the charitable decision making process; and easier record keeping.

Donor-advised funds can be a powerful tool that can be used to accomplish much more than just charitable giving. Speak with your advisor about the pros and cons of a donor-advised fund to determine if one is appropriate for your situation.

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