If the term “donor-advised funds” is new to you, don’t worry; it's not exactly a topic that comes up in everyday conversation. But if you’re looking for a way to donate funds that could help with your overall tax strategy, this might be something you want to know more about.
What is a Donor-Advised Fund?
A donor-advised fund is an account that allows individuals or families to make charitable donations while retaining some control over how those donations are used. It is managed by a sponsoring organization such as a community foundation or other public charity. When money is donated to the fund, it grows tax-free until it is eventually distributed to various charities of the donor's choice.
How Does a Donor-Advised Fund Work?
The process of setting up and managing a donor-advised fund is relatively straightforward. Once you have chosen a sponsor organization and opened your account, you simply make regular deposits into your fund which comprise your total contribution amount; these deposits can occur either periodically or all at once depending on your preference and budgeting needs.
Once the money has been deposited into your fund, you then specify how much should be allocated towards each charity that you plan on donating to; this could include one charity or multiple charities depending on what makes sense for your particular situation and donation goals. The sponsoring organization then takes care of distributing the funds according to your instructions; typically this happens within 1-2 weeks after the request has been made.
What are the Pros and Cons?
Investopedia has created this helpful list of pros and cons:
- Control over account
- Opportunity for a larger tax write-off
- Allows donation of non-cash assets
- Immediate tax benefit
- Don’t get the final say on which charities receive your donation
- Assets can remain in the fund indefinitely
- Fees and minimum donation requirements
- Donations are irrevocable
Can I Set This Up Myself?
As with many things that have to do with financial planning, you CAN get started yourself – but you might benefit from working with a trusted advisor. As a financial professional, I look at my clients’ entire picture, including their values and goals. Together we’ll help make sure you’re on the right path for the future and take into account any charitable giving that you wish to make.
Lincoln Financial Advisors and its representatives do not offer tax or legal advice. Individuals should consult their tax or legal professionals regarding their specific circumstances. This articles is for information purposes only and should not be construed as a recommendation.