One smart money move: Start a donor advised fund for your charitable giving
This article is part of Fortune‘s quarterly investment guide for Q1 2020.
If you ever want to see what true love looks like, just ask financial planners about donor-advised funds.
They swoon like schoolchildren, and for good reason. Such funds are the hottest thing in philanthropy right now, making life much easier for givers and planners—as well as benefiting charities themselves.
“It makes it all really easy,” says Eileen Heisman, president and CEO of the National Philanthropic Trust. “You can be a grantmaker 24/7, and you never even have to write a check.”
Here’s how they work: You make a donation to a donor-advised fund, and get the immediate tax deduction. You can invest those funds for growth, just as you would in other vehicles like 401(k)s or IRAs. So if your $300 grant grows to $500, say, you now have $500 to dole out to worthy causes.
When you want to make that donation to a charity of your choice, the fund will handle that for you, presuming your desired recipient has official charitable status. An added bonus, if you are donating stock: You get the deduction for the full value, but you don’t have to pay capital gains on whatever increase you may have enjoyed.
A big part of the attraction is simple housekeeping: Rather than your charitable donations consisting of $20 here and $20 there, spread over a host of different organizations and never properly tracked, donor-advised funds reduce it all to a simple statement. That’s very helpful come April 15, and this accounts for the ardor of accountants and financial advisers.
Judging purely from the numbers, donor-advised funds are a hit. Total assets in the U.S. as of 2018 were $121.42 billion, according to a 2019 study of almost 1,000 plan sponsors from the National Philanthropic Trust. That’s up 10.5% from the year before.
Meanwhile, contributions for 2018 amounted to $37.1 billion, leading to a record $23.4 billion in grants for the year. The hottest subset: individual accounts. In fact such grants now add up to 12.7% of all individual giving in the country.
Think of it as your own private philanthropic venture, but without all the hassles of an actual foundation (like management and filing tax returns). It also features lower barriers to entry than private foundations: The minimum initial grant to set up a giving account with Fidelity Charitable, for instance, is $5,000. If your workplace offers such accounts, you don’t even have that hurdle.
Fidelity’s offering is the largest grantmaker in the country, giving more than $40 billion to 294,000 charities since its inception back in 1991. Other major players in the field include Schwab Charitable, the Silicon Valley Community Foundation, Vanguard Charitable, and the National Philanthropic Trust itself.
DAFs seem to have gotten extra momentum from recent tax reform, passed by the Trump administration at the end of 2017. Because you can group multiple years of giving in a single year, you can strategize to get over the raised level of standard deductions, and thus claim the full tax benefits of giving.
They may not be right for everyone, though. Donations are irrevocable, for one thing. So even if the money is just sitting there in the account and hasn’t been doled out to any charity, you can never change your mind and withdraw it for yourself, even in cases of a personal financial crisis. “If you are ever going to need that money to live on, you shouldn’t do it,” says Heisman. Or if your giving tends to focus on people or causes that don’t have official charitable status, then this type of fund may not be an appropriate fit.
But otherwise, DAFs are an elegant solution for helping a world that very much needs a hand right now. Financial planners are employing them to cement and deepen relationships with clients—going beyond just talk of asset returns, into a more holistic view of what impact they want to have with their lives, something that can extend to future generations as well.
“I love DAFs for so many reasons,” raves Brian Behl, a financial planner in Pewaukee, Wisc. “The ability to lump together multiple years of giving to itemize deductions, the ease of donating appreciated holdings, the relatively low costs compared to family foundations, easier administration and record-keeping—and the ability to leave a real family legacy.”
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—5 pressing questions to hone your investment strategy this quarter
—Investors are uneasy over the surge of near-junk corporate bonds
—Chasing returns: 12 lessons for real estate investors
—10 stocks that are poised for a stellar 2020
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