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Using Donor-Advised Funds to Cultivate Family Philanthropy

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A couple of months ago I wrote about some great internet tools for researching charities. Today I want to share a simple, yet flexible method for charitable giving that allows you to create a legacy of charitable giving.

A donor-advised fund (DAF) allows you to make a tax-deductible gift to a charitable fund that makes grants to qualified charities over time. The fund serves a conduit through which future grants can be recommended by the donor or by the donor’s family or representatives.

According to a study by the National Philanthropic Trust, the Chronicle of Philanthropy reports that assets held in DAF’s climbed to over $45 billion in 2012.

Donor-Advised Funds: The Basics

Wikipedia provides the following basic description of donor-advised funds:

A donor-advised fund is a charitable giving vehicle administered by a public charity and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A donor-advised fund offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation. Donors enjoy administrative convenience (the sponsoring organization does the paperwork after the initial donation), cost savings (a foundation requires around 2.5% to 4% of its assets each year to run), and tax advantages (versus individual giving) by conducting their grantmaking through the fund.[1]

Mark V. Ewert recently wrote an excellent series of articles for the The Motley Fool about donor-advised funds, which you can read at the following links:

I think it’s helpful to think of a DAF as a sort of charitable savings account. Keep in mind though that while the gift may remain in the savings account for a long period of time, the gift to the DAF account is irrevocable — you cannot change your mind and take it back.

Estate Planning With Donor-Advised Funds

DAF’s are not only an excellent vehicle for lifetime giving, but they can also be ideal for estate and legacy planning. You can designate a DAF as a beneficiary in your will, trust or beneficiary designation, just as you could for a specific charity.

You might make an estate gift to add to an existing DAF that you already created and funded during life. But what if you didn’t set a DAF up during your life — can you still use this vehicle? Yes. You can instruct your trustee or executor to establish the DAF after your death with funds that you earmark under your will, trust or beneficiary designation.

In either case, you will want to either specifically designate your successor advisor(s) or instruct your fiduciary to appoint such advisor(s). For example, you might name your children collectively as the team of advisors whose role is to research and recommend grants to qualified charities. You can provide your advisors with guidance as to your preferred types of charities or you could leave it completely up to them.

Cultivating Family Philanthropy

You probably see how this arrangement has great potential for fostering and cultivating ongoing philanthropic interests. Your children or other advisors will be tasked with researching charitable programs that interest them and do the most good.

In many cases, local charities and causes can hold great interest. Oftentimes there is opportunity for potential givers to meet with community leaders and others with similar interests to learn about the causes and how funding will help advance those local causes. This is a process that can be enjoyable and rewarding both personally and professionally.

For example, suppose your child has a great experience with a local community hospital and wants to support the latest technological advances in an area of interest. As adviser, your child could meet with a representative from a foundation, such as the Northwest Community Healthcare Foundation, to discuss recommending grants from the DAF for specific needs. (Full Disclosure: I’m a member of the NCH Foundation Planned Gifts Committee).

Sponsoring Organizations

A DAF is administered by a “sponsoring organization” that itself is a public charity. In many cases, this will be a major national financial institution. The three largest are Schwab, Fidelity and Vanguard. Each provides a wealth of information about their programs:

There are also national sponsors that are not run by financial institutions. For example:

Religious organizations maintain some of the more prominent DAF’s, including:

There are also hundreds of sponsoring organizations on a local level. One of the largest is The Chicago Community Trust.

Some Additional Reading

If you’re interested in reading more about DAF’s, here are a few additional useful articles that I recommend:

What do you think — are donor-advised funds a good charitable giving option? If you’re interested in integrating the use of a DAF into your estate plan, you should contact your estate planning attorney.

Image courtesy of Flickr by Tim Green