AskDong

We are in the season of giving, so in that vein I’m answering this question from a reader.

I am thinking about putting money in a Donor Advised Fund, but don’t really know what the pros and cons are of using a Donor Advised Fund versus givingn money directly to charity. What do you think?

-S

I looked into Donor Advised Funds a few years ago as vehicle for my charitible giving, but decided I didn’t have enough of idea of how I wanted to give to warrant setting up such a fund. I imagine many of you are scratching your heads just like I did a few years ago. Donor Advised Funds? A Donor Advised Fund is basically a mini foundation. It used to be purely the tool of the very rich who wanted to be like the uber rich. However Donor Advised Funds are actually relatively affordable to get into today. Fidelity let’s you open a account with the Fidelity Charitable Gift Fund with as little as $5,000. Schwab recently followed Fidelity’s lead and lowered their minimum on their Schwab Charitable Fund. from $10,000 to $5,000 as well. Vanguard lags behind both Schwab and Fidelity, requiring $25,000 to open account with the Vanguard Charitable Endowment

While the charitable funds are “run and operated” by the likes Schwab, Fidelity, and other financial institution, the accounts work very much like a standard brokerage account that you might have. You pick what funds you want to invest in, and you pick what charities you want to give gifts to. However, once the funds which can be cash, stock shares, and mutual funds are handed over, they are turned over irrevocably. The gift is made, and the money is no longer yours. This is both a minus and plus. Technically speaking the money is “owned” by the the charitable fund/endowment, and as a donor one only make recommendations for grants. One of the big benefits is that fund takes care of the paperwork of giving, and will also research different charities to make sure they meet minimum standards.

Because the gift is irrevocable, the deduction can be taken immediately. Like a standard gift of shares, the full value of securities is tax deductible. Being able to take the deduction immediately is great if you want to make a charitable gift, but haven’t decided to whom. In addition once the funds are in the account they are sheltered from any tax complications. A donor can effectively buy and sell without tax consequences to him or her personally and more importantly the money available for giving.
So what are the drawbacks to a Donor Advised Fund? The main one is that you can’t change your mind about giving. The money is gone. I don’t think this is actually a big drawback, however, as this is always the nature of giving (or at least it should be). However when most people set up Donor Advised Funds, they are often handing over money that they plan on giving for years to come. That fact highlights the major difference between giving to charity year to year and a Donor Advised Funds. Setting up Donor Advised Fund is sustained commitment to giving. It’s not a tool to be used to give gifts in any one year, but rather for a lifetime of giving. In addition there are some restrictions on grants. Grants cannot for instance be used for admittance to Galas, or used as part of personal commitment to ride or walk event. Generally speaking the limited and reasonable restrictions are in place from preventing donors from using the funds for his or her own benefit.

I came across Donors Choose over at Consumerist Commentary who is working with pfblog.org to help promote select projects. While the specific campaign sponsored by pfblogs is aimed at financial literacy, there are tons of different types of projects to fund. I absolutely love the concept and will be adding it as a regular part of this blog. I have many friends who are either currently teachers or have been teachers in the past. They have one the most difficult and important jobs out there and reap relatively little in terms of financial rewards. And on top of that, they often have to purchase school supplies out their own pocket, and only the first $250 is deductible. I know plenty of teachers who spend much more than $250 of their own money on making sure their kids have the proper tools to learn (sometimes this is simply having pencils and notebooks). To add insult to injury, apparently Congress has yet to vote to extend the law that allows for this deduction.

My plan is every month to issue a challenge to which I will personally contribute a minimum of $25 towards. I’ve started this month with one project in my home state of Massachusetts, and challenge of $100. The project is to secure funds for the purchase of musical instruments for young children. While I’m hardly musically inclined myself, I firmly believe that music (and the arts in general) are an important part of education that too often is the first to get cut. Hopefully if these challenges are successful, I will sponsor challenges with many different projects.

I also want to take some time and acknowledge some of my inspiration besides Flexo at Consumerism Commentary. Nickel of Five Cent Nick impressed me with a very generous offer to match $1000 from readers who gave to the Conservation Fund. In general, I was inspired by all the blogs that participated in Blog Action Day. I was reminded not all of us personal finance bloggers are just bunch of skinflints who only care about our networth. Also, I’ve been plowing through the life of Chuck Feeney whho is certainly an inspiration to give back. Click on the graphic on the left to contribute to the challenge. Going forward I will be adding a challenge graphic as standard part of the blog.