19 Aug What Is a Donor-Advised Fund?
There are many ways to leave money to a charity in your estate plan. For example, you can make charitable donations in your will or name a nonprofit as the beneficiary of your 401K. You could also set up a charitable trust or contribute to a donor-advised fund. Never heard of a donor-advised fund before? We explain how they work and why they can be advantageous in more detail below.
Leaving Money to a Charitable Organization
Making charitable donations in your will is a great way to support a cause you care about. However, since wills are subject to probate, it may be some time before your wishes can be fulfilled. And, because the expense of probate could reduce the amount of your donation, a will is not always the best tool to use.
If you want to avoid probate, setting up a charitable trust or a donor-advised fund is a better route to go. Plus, both of these options allow you to further maximize your contribution by investing your funds before you donate them.
How Does a Donor-Advised Fund Work?
With a donor-advised fund, you’re basically setting up an account with a non-profit investment firm. They will invest the funds on your behalf, to grow your capital and maximize your gift. You can choose one or more qualifying organizations or charities as beneficiaries, and decide when and how your gift will be distributed.
What Are the Advantages of a Donor-Advised Fund?
- The contributions you make to a donor-advised fund during your lifetime are tax-deductible. This means you can claim a deduction on your tax return. Your donation will also avoid gift taxes, since the funds are going to a tax-exempt organization.
- You can make donations (or grants) to your favorite non-profit any time you choose, and/or set up a legacy plan to continue making donations after you pass away. You will also have the option to make anonymous donations if you prefer.
- Donor-advised funds also allow you to maximize your giving. By choosing to invest a portion (or all) of your contributions, you can make your charitable donation even larger.
- Any growth in capital is tax-free, and the trust will manage the investments for you.
- And, if you want to build a family legacy, you can name one of your family members as successor, so they can continue your good work.
Examples of Donor-Advised Funds
Scenario #1:
Laura is a teacher who is passionate about providing quality educational experiences to all of the children in Arizona. She decides to set up a donor-advised fund that benefits the Arizona Charter Schools Association. She’s making yearly contributions that she can write off on her taxes, and investing her funds in order to grow the capital. She set up a legacy plan that grants the entirety of the fund to her chosen organization after she passes away.
Scenario #2:
Mark is a retired military veteran who wants to support other veterans in need. He sets up a donor-advised fund that benefits U.S. Vets Phoenix, an organization that assists veterans and their families with housing, mental health services, and career development. He contributes a percentage of his pension, and sets up a yearly grant that begins in his lifetime and ends when the funds have all been dispersed. Because he wants to remain anonymous, he chooses not to be recognized by name.
Making Charitable Donations in Your Estate Plan
If you’re interested in opening a charitable trust or a donor-advised fund, talk to the experts at Phelps LaClair. We can help you devise the best plan for supporting the causes you care about the most. If you want to leave a lasting legacy, give us a call to schedule a free consultation today.
Photo by Lina Trochez on Unsplash used with permission under the Creative Commons license for commercial use 8/13/2024.