Using a Donor-Advised Fund to Get a Tax Break

October 20, 2014 | By: TaxCure Staff

donor advised fundYou probably know that you can get a tax break when you donate to certain causes. You can even donate a stock or other asset to charity and get a tax deduction. However, it’s possible to go beyond just giving an asset and being done. The tax benefits associated with donor-advised funds are allowing them to increase in popularity.

What is a Donor-Advised Fund?

Basically, a donor-advised fund is one in which you provide an asset to the fund, and then the money grows in the account. You can then designate, with the sponsor of the fund, which charity (or charities) should get the money later.

Once you make a gift of the asset to the fund, it is gone. That means that you get to deduct the full market value of the asset at the time you donate it, even though you haven’t actually given anything to charity yet. There are some limits on how much you can give this way, and the way you deduct the value of your gift, but generally you get more bang for your charity buck when you use it this way.

In order for this to work, though, you have to put the money into a charity fund that is properly sponsored. Many brokerages offer these funds. The money in the fund grows tax-free, and you can decide how you want the money invested down the road. This allows you to get a tax deduction now, and you can wait to decide where the money goes until later.

Another reason that donor-advised funds are gaining in popularity has to do with the fact that you don’t have to get the documentation for your gifts. It’s up to the fund’s sponsor to make sure the paperwork is what it should be with the IRS. As a result, it’s much more convenient for many philanthropists.

A donor-advised fund can also make it easier to give anonymous grants from your account. This means that you don’t end up with a bunch of letters asking for more donations from charities.

With the right setup, it’s possible to funnel your giving through donor-advised funds, and reap tax benefits. You aren’t going to end up with an additional tax deduction when you finally make your designation to a charity, but it can be a good way to get the full benefit of a deduction now. Plus, if you want to donate an asset to a charity, but it can’t handle non-cash donations, this is a way to benefit. You can put the asset in a fund, and then cash proceeds can go to the charity.

Just like any other fund, though, you need to be aware of fees. You are going to be charged certain fees, and you need to figure out whether the fee reduces your ability to give too much. Many investors find, though, that the cost of a donor-advised fund is still worth it. Don’t forget to check into minimums, as well as stay on top of the tax laws. Donor-advised funds — and the possibility of changing rules — are always subjects of interest to politicians.