Q: I am trying to teach my grandchildren about charitable giving. In my reading, I came across something called a donor-advised fund and I am wondering how they work and if they might be a good option for me.
A: A donor-advised fund is an account you hold at a sponsoring non-profit organization from which you can direct further charitable gifts. Donor-advised funds give you great flexibility in your charitable giving. You can start a donor-advised fund with a donation as small as $5,000 and then make grants from your fund over time to charities of your choice. In many respects, your donor-advised fund operates as if it were your own little private foundation, but at a fraction of the cost.
A donor-advised fund can be a great way to teach children about philanthropy. Here’s how it could work:
1) Open a donor-advised fund at a sponsoring organization.
2) Make a charitable contribution to your donor-advised fund.
3) Work with your grandchildren and help them identify worthy charities.
4) Direct the donor-advised fund to grant money to the designated charity.
The sponsoring organization handles all the administrative details related to your fund. In exchange for an annual fee—usually 1.25 percent or less—it will see to the accounting, tax filing, grant administration, and regulatory compliance. You and your grandchildren will be free to focus on grant making.
The money you contribute to your donor-advised fund is an irrevocable gift to the sponsoring charity. This means that once you put it in your donor-advised fund, you can’t get it back. It also allows you to claim a tax deduction in the year the gift is made.
Sponsoring organizations must be bona fide 501(c)(3) public charities and the charities you support with your donor-advised-fund must also be 501(c)(3) charities. Your sponsoring organization will help make sure your grants go only to charities that are properly registered with the IRS.
You should understand that although you retain advisory privileges on your donor-advised fund, the sponsoring organization is not obligated to follow your advice. In practice, however, sponsoring organizations are anxious to help their donors. In my experience, the only time a donor’s instruction has not been followed has been when they asked the sponsor to make a grant to an unqualified recipient.
Donor-advised funds have been around since the 1930’s, but their popularity has soared in recent years. One reason for their increasing popularity is the entrance of powerful financial institutions like Schwab, Fidelity and Vanguard into this market. The marketing prowess of these institutions has raised investor awareness and has allowed them to rapidly become serious players in this space. Schwab Charitable for example, is one of the largest providers of donor-advised funds in the country. Since its founding in 1999, Schwab Charitable has facilitated over $7.5 billion in grants to more than 108,000 charities on behalf of its donors.
The Community Foundation for Monterey County also offers donor-advised funds, but with a more personal touch and deeper community knowledge. They have resources and tools that can help you fulfill your desire to teach your grandchildren about philanthropy. In addition, their knowledgeable staff can help guide you through the process of setting up the fund to make sure it accomplishes your purposes.
Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.