Donor-Advised Funds: Are They For You?

One increasingly popular tool for donors to use in planning their giving is a donor-advised fund. Donor-advised funds allow you to establish a fund within a sponsoring organization and then direct charitable gifts to the organizations of your choice from that fund.

You will receive an immediate tax deduction when you put money in the fund and generally can recommend how the fund invests. Over time, you can advise the sponsoring organization to make grants from the fund to one or more charities, such as the Mackinac Center.

In addition to making grants during your lifetime, you also may designate a charity to receive a grant after your death. That way, the funds continue to serve your values and principles even after you have passed.

The Mackinac Center itself does not sponsor donor-advised funds, but we are fully eligible to receive gifts from them. Over the years, we have received numerous gifts through such funds. The sponsoring organizations have included the Barnabas Foundation, National Christian Foundation West Michigan, Fidelity Charitable and various community foundations. We have also received gifts through Donors Trust, which supports organizations that promote free markets.

Hillsdale College also acts as a trustee for donor-advised funds, and the Mackinac Center has partnered on planned gifts with Hillsdale in the past.

Why people like donor-advised funds

Some of the reasons people choose donor-advised funds as a giving vehicle include:

• Receiving tax benefits, including tax planning: A full charitable deduction is available in the year that the gift is made, but you can decide later where to give.
• Enjoying relatively easy and cost-effective services, especially when compared with administering a private foundation.
• Being able to give anonymously and benefit from an extra layer of privacy if desired.
• Receiving help in ensuring your philanthropic vision over time.
• Giving a consistent amount each year despite ups and down of income; for example, you might set aside $100,000 in a donor-advised fund and then use that to augment giving from other resources in low-income years.

Disadvantages of donor-advised funds

You must also consider the disadvantages of a donor-advised fund. Perhaps the biggest drawback is the loss of control. It is called an “advised fund” for a reason. When you set up an account at a sponsoring organization, you give to it legal control of the money you entrust. That legal framework makes it important for you to set up a fund only with a sponsoring charity that shares your values.

You also should be aware that donor-advised funds come with fees for management and administration.

What you can donate

In most cases, you can make gifts of cash or appreciated securities, and many donor-advised funds also handle real estate, private business interests and private company stock.

Make grants at the donor’s convenience

You can make a gift to a donor-advised fund in one calendar year, but delay making a grant until a different year. The organization that holds your account conducts due diligence to ensure that your money will be granted to IRS-qualified grantees only.

Grow your donation, tax-free

While you, as a donor, decide which charities to support, a donor-advised fund could grow, based on your investment preferences, making more money available to further your values through philanthropy. Similar to what you would do with other investment decisions, you would want to discuss this with the foundation acting as trustee of the donor-advised fund.

The information provided in this article is not intended to provide tax or legal advice to readers. The Mackinac Center recommends that you talk with your attorney or financial planner about donor-advised funds or other giving vehicles as you plan your charitable giving.