Using Donor-Advised Funds to Give with Intention

Summary

 

You may have heard of the Giving Pledge, which was created by Bill and Melinda Gates and Warren Buffet, in which 40 of the wealthiest individuals and couples in the made a commitment to give away more than half of their wealth. The media highlights lots of stories like these, leading many people to assume that you have to be very rich to participate in philanthropy.

But in fact, charitable giving is driven mostly by individuals, and in 2017 individuals gave $287 billion, accounting for 70% of all giving and representing a 5% increase over 2016. And also in 2017, for the first time ever, total charitable giving exceeded the $400 billion mark, spurred by growth from all four sources of giving – from individuals, foundations, bequests, and corporations.[1]

 

Switch From “Drive-By Philanthropy” to Intentional Giving

When it comes to donating many of us practice “drive-by philanthropy,” where we make ad hoc or impromptu contributions to causes without giving much thought to our cumulative giving. But events like Giving Tuesday, celebrated on the Tuesday following Thanksgiving, hint at trends where planning for giving becomes more the norm.

Do you regularly give to charities and causes? Then it may be worthwhile to review your giving comprehensively. Just as you have a financial plan to consider all of your goals and needs, having a complete picture of your giving can provide valuable insights about how and why you give.

 

Donor-Advised Fund: What is it and How Does it Work?

A donor-advised fund is a giving vehicle that allows the donor to pass money through to charities. Using a donor-advised fund is one way that you can move from “drive-by philanthropy” to intentional giving. Here’s how it works:

  • A donor contributes cash, securities or other assets to a donor-advised fund that is administered by a charitable sponsor, a tax-exempt organization that manages the donor-advised fund. As the name implies, a tax-exempt organization (classified as a 501(c)(3) organization by the IRS), is exempt from taxes, so your donations to these organizations are indeed tax-deductible.
  • You can open a donor-advised fund with as little as $5,000. Once you make a contribution, the charitable sponsor works as an intermediary to distribute the funds (or grants) to the qualified charitable organizations of your choice.
  • It’s important to remember that assets you transfer to a donor-advised fund are irrevocable, meaning the assets are no longer yours. If you’re unsure of just which charities you want to support, the funds can be invested so your account can grow tax-free. Then once you’re ready, as a donor, you can direct donations (called grants) to qualified charities.
  • With a donor-advised fund, you receive a tax deduction at the time of your contribution, so the immediate impact on your taxes can be quite significant. And if you contribute stocks or other illiquid holdings, such as real estate, you may be able to reduce or eliminate capital gains.

 

Advantages and Benefits of Donor-Advised Funds

Donor-advised funds have risen in popularity in recent years, with contributions totaling $29 billion in 2017, an all-time high.[2] The use of donor-advised funds is growing because they are easy to set up, flexible, and convenient.

Easy to set up and manage. To open a donor-advised fund you don’t need to be wealthy like Warren Buffet – that’s a common misconception around donor-advised funds. For commercial donor-advised funds, usually run by financial firms (like Schwab, Fidelity, and Vanguard), account minimums are $5,000. If you don’t want to partner with a financial institution to open a donor-advised fund, community foundations and single-issue charities also offer donor-advised funds. Community foundations typically focus their efforts on a defined geographic area, while single-issue charities support specific causes. Some common single-issue charities include universities, churches, other faith-based charities, United Way or The Sierra Club, for example.

Flexible. With a donor-advised fund, unlike a private foundation or a charitable trust, there is no IRS-required annual distribution. This means you can give when you want to give, based on your timeline. You can also involve your family in your giving if philanthropy is something that resonates with your family values. If you have children or heirs and want to pass on the donor-advised fund, you can name them as successor owner of the donor-advised fund account. Also, while most donors contribute to the charities of their choice publicly, if privacy is a priority, donor-advised funds offer the flexibility to make anonymous donations.

Convenient. With a donor-advised fund, you don’t need to worry about keeping track of the paperwork and tax compliance involved in charitable donations, as the fund sponsor takes care of that for you. The donor-advised fund also takes care of the due diligence for the charities you decide to donate to. Rather than making impromptu donations, you can consider your giving intentions and structure your giving to the causes and charities you’re passionate about.

Donor-advised funds are a great financial planning tool for charitable giving that can often be overlooked, as we tend to compartmentalize our investments from our giving. We encourage you to speak with your advisor about your financial goals to see if a donor-advised fund is right for you. It’s important to share details around your giving intentions, past charitable contributions, and any concentrated positions you may hold on your balance sheet, so that your advisor can determine which strategies are most appropriate for your situation.

 

 

[1] Source: Giving USA 
[2] Source: National Philanthropic Trust, 2018 Donor-Advised Fund Report 

 

 

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.

This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.

Thanks for visiting!

You are leaving the Mercer Global Advisors website and will be redirected to the Science of Economic Freedom (SOEF) website. SOEF is brought to you by Mercer Advisors Inc., the parent company of Mercer Global Advisors Inc., and is not involved with investment services. Mercer Global Advisors Inc. is an SEC-registered investment adviser headquartered in Denver, CO.

The Science of Economic Freedom website should not be construed by any consumer and/or prospective client as Mercer Advisors’ solicitation to effect, or attempt to effect, transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Furthermore, information on the SOEF website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from Mercer Advisors.