When crafting a plan to achieve your charitable-giving objectives, your accountant or attorney will likely consider several factors, such as flexibility, simplicity, and the ability to handle contributions of non-cash assets. Starting a private foundation is one way to approach these more complex giving issues, but today’s givers should also consider another more convenient option: a donor-advised fund (DAF).
Private foundations and donor-advised funds are similar in that both have advantages as charitable-giving vehicles, such as offering considerable flexibility in the timing of one’s giving. For example, if you have a year-end income spike from a bonus or the sale of stock options, you can make an immediate gift to either a foundation or DAF and gain a charitable-giving tax deduction for the same tax year for which the income is reported. Later, you can make an unrushed decision about which charities to support from that gift.
One significant difference between a DAF and a foundation is cost. The initial cost of establishing a private foundation, as well as the on-going operational overhead, can be substantial. A donor-advised fund, in contrast, typically can be established with no — or a very low — minimum contribution and then operated for a low annual fee. This puts a DAF giving plan within reach of the small-business owner and many other givers. The table below details some of the significant differences between DAFs and foundations.
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When it comes to overall simplicity, donor-advised funds offer another advantage over private foundations. DAFs allow you to consolidate and organize all your giving through one entity, rather than having to keep track of checks, receipts, and reporting from multiple charities. You can also use the fund to make anonymous grants to charities, something much more difficult to do through a private foundation. And many DAF managers provide a way to pre-schedule one-time or recurring grant requests online, similar to online banking.
Another reason to use a donor-advised fund is the relative ease with which you can make tax-advantaged gifts of non-cash assets such as real estate, business interests, or closely held stock. You simply gift the asset to the fund, have the fund take care of selling the asset, then have the money placed back in the fund for you to distribute among multiple charities at your discretion and on your timetable.
In addition, donor-advised funds offer significant tax advantages over private foundations in relation to non-cash assets. Donations of such assets to a DAF are deductible at fair market value, rather than the lesser of fair market value or cost basis value, as is the rule for private-foundation gifts. This can mean a significant difference in tax savings if one is donating highly appreciated property. Further, you can use a DAF to donate real estate and closely held business interests without running into “self-dealing” restrictions imposed by the IRS for private foundations. And there is one more tax advantage: public stock donations — as well as cash — are deductible at higher rates when given through a DAF.
These advantages (of cost, simplicity, and more-favorable taxation) have made donor-advised funds the most popular charitable-giving tool in America. Indeed, many large mutual-fund companies and community foundations now offer such funds. Not surprisingly, however, few are managed from a Christian perspective. This is important, not only in terms of the types of charities your money ultimately supports, but also with respect to the investments the DAF makes with your money between the time of your donation and the fulfillment of grant requests.
Giving through an organization that has an explicit Christian emphasis is an important safeguard. Many are the reports of well-intentioned Christians who used private foundations to support Christian causes during their lifetime and beyond. After they were gone, however, the foundation boards ultimately adopted grant-making values that differed sharply from the donors’ original intent.
To safeguard against this, many of today’s Christian donors are using donor-advised funds owned and housed by foundations that share their biblically rooted values. One such foundation — launched in 1982 by financial authors Larry Burkett and Ron Blue, along with attorney Terry Parker — is the National Christian Foundation (NCF). Over the past 35 years, NCF and its nationwide network of local foundations have distributed grants totaling more than $7 billion to thousands of churches and ministries worldwide. The NCF Giving Fund® has become the nation’s largest donor-advised fund for Christian givers. (You can learn more at NCFgiving.com.)
A further safeguard is to provide written instructions to managers of your DAF regarding how your giving should be administered after your death (by someone you designate, such as your heirs). Doing so will help assure that only charities that operate in accordance with your values receive grants after you pass away. Taking such precautions is especially important for those who wish to pass on a legacy of Christian giving to future generations.
[Editor’s note: This article was prepared at SMI’s request by the staff of the National Christian Foundation. Austin and Mark both use NCF giving funds and are enthusiastic supporters. For more information about the NCF or its local affiliates, go to NCFgiving.com or call 1-800-681-6223.
Other Christian organizations that offer donor-advised funds include WaterStone (WaterStone.org) and Barnabas Foundation (BarnabasFoundation.com). Note that SMI doesn’t have first-hand experience with these organizations.]