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Making the Most of Donor-Advised Funds

By Paul Jacobs
Paul Jacobs headshot

Paul Jacobs

Most forms of charitable giving are well-known. You may choose to make your charitable contributions directly using cash, shares of stock, or other property. You may also have included legacy gifts in your will or estate plans. But depending upon your situation, a donor-advised fund may allow you to maximize the tax benefits for your charitable contributions, while still providing support to the charities most important to you.

Donor-advised funds are philanthropic vehicles that allow donors to receive an immediate tax benefit for a charitable contribution, even if they do not yet know which charitable institution they plan to support or if they would prefer to let assets appreciate tax-free before making a gift.

Here is how it works: A donor makes an irrevocable gift to a particular donor-advised fund, like Fidelity or through their Jewish Community Foundation. Different funds offer different investment options and may establish different rules as far as minimum contributions and the types of assets the donor can give. In all cases, the irrevocable gift is immediately tax-deductible. The fund allocates your contributions in an investment portfolio, where they grow tax-free.

When you want to make a gift, you request that the fund make a grant to the qualified charitable organization of your choice. Donors can request grants at any time after their initial contribution. The fund handles the administrative aspects of the gift and will send the donor a statement once the gift is complete.

The major advantage of a donor-advised fund is that it allows a donor to realize the tax benefit of a charitable donation immediately, while making a grant to one or more charitable organizations in the future. This gives gifted funds time to grow. If your income varies from year to year, a gift to a donor-advised fund allows you to claim charitable deductions in advantageous years, while allowing you to support charities on a steadier basis. Donor-advised funds are typically a cheaper and a less administratively burdensome option than setting up a trust or a private foundation. Donor-advised funds can also allow for a level of anonymity that is often impossible with a direct gift.

In addition to lifetime gifts, you can use donor-advised funds as part of your estate planning. Most funds will allow you to name a family member or other successor to make recommended donations after your death. Alternatively, you can set a recommended charitable recipient to receive the balance of your account, either as a lump sum or over a set amount of time. Generally, you can make these designations directly with the fund administrator, the same way you would set a beneficiary for an IRA. In most cases, if you fail to specify a person or charity as a beneficiary, the fund administrator will distribute funds to philanthropic causes specified when you signed up for the account but, as with all estate planning, the best way to ensure the outcome you want is to state your wishes well in advance.

Paul Jacobs is vice president of education for Temple Sinai and serves on its board of trustees and legacy fundraising committee. As a financial planner, Paul works with potential donors to design customized charitable plans, with a goal of maximizing their philanthropic impact while minimizing income and transfer taxes.

This article is for informational purposes only and is not a substitute for personalized financial or legal advice. Please contact your professional advisor or Jewish Community Foundation for more information.