Donor-advised funds: Another way to benefit Outreach while reducing your tax burden

by Jo Mayer and Paul Crandall

In June’s column, we explained the pros and cons of qualified charitable distributions (QCDs), noting one big limitation: QCDs can only be used by those over 70.5 years old. This column explains an alternative—called donor-advised funds (DAFs)—which are financial tools available to all adults.

Stockbridge Community Outreach has seen a gradual increase in third-party checks coming from investment firms and community foundations on behalf of individual donors.

Curious about the trend, we reached out to learn more fromlocal resident and Stockbridge school employee Katee Buddenborg, who gave us permission to share her experience.

Buddenborg explained that she had donated money to a donor-advised fund and directed that checks be sent each month to Stockbridge Community Outreach. Interesting! How does it work?

She responded, “When we decide to make a donation, we look up the charity with the Tax ID number to see if it’s listed [with the IRS as a 501(c)(3)]. If it is, we put in a grant recommendation. We select the organization, choose an amount that we would like to donate and select if it’s a one-time donation or recurring. We can select a grant purpose, and where we’d like the funds to be used … Once we do that, we submit it for review and wait for approval.”

How donor-advised funds work

Establish and contribute: Donors open an account with a sponsoring organization, and contribute cash, stock, or complex assets like real estate or crypto to receive an immediate tax deduction for that year.

One great way to start is to contact a local community foundation. They tend to be more aware of local needs and effective 501(c)(3) organizations and can help donors determine where to donate funds for the most local impact. For example, Capital Region Community Foundation in Ingham County and Jackson Community Foundation in Jackson County are two local foundations offering DAFs.

Advise: Donors request, through the sponsoring organization, that a check be sent to a particular IRS-qualified public charity, like Outreach.

Invest and grow: DAF assets are invested and grow tax-free.

Anonymity: Optionally, donors can choose to remain anonymous when giving money to a charity through a DAF.

Key benefits, rules and drawbacks

Following are some important things to know about DAFs.

• Tax Advantages: Contributions to a DAF are deductible in the year they are donated. No capital gains tax is paid on donated appreciated securities.
• Flexibility: There is generally no annual deadline or minimum distribution for disbursing the funds.
• Irrevocability: Funds cannot be returned to the donor. The donor cedes legal control to the sponsoring organization, though the donor retains advisory privileges. While sponsors usually follow donor recommendations, they are not legally obligated to do so. Also, donors deciding to terminate a DAF can request that the sponsoring organization close the account after all remaining assets are distributed to the IRS-qualified public charity.
• Fees: Sponsoring organizations charge administrative fees, often based on a percentage of assets, plus investment fees. The fees charged by community foundations tend to be lower than those charged by financial institutions.
• Minimums: Some sponsors require a hefty minimum initial contribution and a waiting period before beginning to disburse funds to charities.

While DAFs have only recently arrived on the radar at Outreach, that doesn’t mean they are a new thing. According to Wikipedia, the first donor-advised fund was created by the New York Community Trust in 1931. Over the years, tax laws and financial institutions have evolved and now DAFs are part of the portfolio options at many foundations and financial institutions. In fact, as of 2015, donor-advised funds were the fastest growing charitable giving vehicle in the U.S. (“Charitable Giving Statistics.” NPTrust.org. 2015-02-17.)

Thanks to Buddenborg and others, Stockbridge Community Outreach is becoming part of this growing trend.

Important note: It is strongly advised that you consult with a financial advisor before making financial decisions.

Our local food pantry, crisis, and referral center is located in the Stockbridge Activity Center (old middle school) near Cherry and Elm streets in Stockbridge. Office hours are 1-3 p.m. Monday, Wednesday and Friday and by appointment. Contact us at Outreach49285@gmail.com, 517-851-7285, or find us on Facebook.