Year-end and the holidays encourage philanthropy for many people. If you’re among them, as part of your year-end planning it’s important to clearly define your charitable giving goals and explore the best ways to achieve them — for the benefit of the charitable organizations and yourself. Depending on your situation, you have several options available.
You can make an outright gift of an asset, as many people do, or gift an asset through a private foundation. Another possibility is to establish a donor-advised fund, which is helpful for benefactors who want to make substantial donations to a few nonprofits or make smaller donations to a large number of nonprofits. In either case, it’s a thoughtful, flexible and cost-effective way to manage your philanthropy.
A donor-advised fund is custodian account, established for as little as $5,000 and typically made through an independent financial advisor. It’s much like any other investment account, except that contributions made to the fund are irrevocable charitable contributions. In essence, it acts as a repository for all of your charitable contributions until you decide when and to whom you want to make a gift. In the meantime, your contributions accumulate in an investment account. Smaller accounts will be managed in a pooled investment account, while an independent investment manager may manage larger accounts.
Donors are eligible for a tax deduction in the year contributions are made, yet the gifts can be spaced out over several years and earmarked for the nonprofit of their choosing. Aside from the immediate tax benefits, donor-advised funds will do all the tax reporting. Additionally, any growth inside the fund is not taxed, and when donors gift appreciated assets, such as stocks, they realize no capital gains so more of the net proceeds are passed on to the nonprofit.
Many people who are on their way to achieving, or have achieved their wealth goals, turn to philanthropy. Most begin their gifting in well-intentioned but haphazard ways. Even though the gift is intended to benefit others, without a strategy behind it it may not have the intended outcome for the charity or the giver. At the very least, philanthropy can become somewhat burdensome to manage.
With a donor-advised fund, your gift-giving can become more strategically focused, allowing you to separate the emotional and tax-oriented aspects of granting requests. Through it, you can gift wisely and without stress. When you make a granting decision, everything from the due diligence of the grantee to the distribution of the grants to the record-keeping is handled by the custodian.
Some donors take it a step further and create a philanthropy policy statement that specifies the criteria for grants. This effectively removes requests by family members or soliciting organizations.
Donor-advised funds can provide the means for more strategic, deliberate and thoughtful charitable giving. However, it’s the beneficiaries that will reap the benefits. Through a structured gifting strategy utilizing a tax-favored investment fund, the proceeds will go further. And through the potential growth of assets, your legacy can even expand.
Did you know Alpine Bank has a wealth management division? Consult a local professional about donor-advised funds and all aspects of your assets and investments.
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