Using donor-advised funds for giving

Published 9/16/2018 in The Maryland Daily Record 

(Second of three parts on personal financial planning)

Charitable giving is at the heart of the anatomy that makes up Baltimore. When I first moved here, I was connected to Dara Schnee who is now the vice president of philanthropy at the Baltimore Community Foundation. Dara was working in development at Kennedy Krieger Institute at that time, and it was evident from our first meeting that Dara is a person with philanthropy at the core of who she is. Raised in a family of devoted philanthropists here in Baltimore, Dara sat me down to explain how Baltimore works as I struggled in my early days here to find a way that I would I fit in.

What Dara taught me in that conversation left a lasting impression that has proven true to every word in the years that have followed. She explained that Baltimore is a city where people connect through their philanthropic efforts and interests. People come to know each other through many channels of volunteerism from across various communities around the area. She advised that I would do best to focus on the issues that I care most about and on this path, I would find my people along the way. I have been volunteering in different ways ever since.

Through my professional work, I have had experience advising people about the ways to fulfil their charitable giving via direct contributions of cash and stock, family foundations and in more recent years, the popularity and availability of donor-advised funds has been on the rise. There are some meaningful differences between these different types of gifting vehicles each with some merit though donor-advised funds offer the greatest degree of control and flexibility with far less complexity, regulation and cost of administration as compared to establishing a charitable foundation to fulfil giving.

History of funds

Donor-advised funds have actually been around since 1931 when the New York Community Trust established the first fund. Since that time, more than 200,000 donor-advised have been established at sponsoring organizations across the country. The structure allows for the gift of cash or stock that is donated into a separate account under the sponsoring organization. The gift is made at fair market value at the time of the gift without regard for the tax basis associated with the gifted asset. The donor receives a current year donation amount and the fund is able to sell the gifted asset without tax consequences. Once the funds are in the donor-advised fund account, the donation is considered a completed gift; however, there is no required timeline for the donation to be distributed to the ultimate charitable beneficiary.

By way of example, someone holds a highly appreciated stock that if sold personally would create a significant capital gains tax. By donating this stock directly to charity, the total amount would be gifted directly, and the donation would be completed. Using the same stock and gifting this into a donor-advised fund, the gift would be considered complete but the ultimate amount to go to charity can be spread out over time as it makes sense based on personal preference.

Meanwhile, the assets in the donor-advised fund are invested in a portfolio of investments that have the potential to grow over time. So, the single stock position that made up the donation is sold, and the proceeds are reinvested based on the objectives of the assets.

If the goal is to give away a steady but lower amount each year, a growth portfolio may be appropriate. If the goal is to give away larger amounts over a shorter number of years, stock market risk may not be appropriate, and a cash alternative would be available. The key to this approach is the flexibility and control to decide. Unlike a direct gift, there are costs associated with these options which can be worth evaluating. Though compared to the average foundation, depending on the value of the gift and account balance in the donor-advised fund, the annual administrative fees of up to 1 percent can be a better value.

Locally, there are a handful of sponsoring organizations that receive gifts into their own established donor-advised funds. Depending on the focus of the organization, this will guide the donor as to what is the right fit for their individual situation. You should consult your accountant to best understand what will work for your personal situation.

The more information we have about these different vehicles, the better choices we can make as our circumstances afford us the ability to give financially in meaningful ways. Thankfully, for all of us living and working in the Baltimore area, we have the unique benefit of coming together around our philanthropy in a way that is unparalleled in other cities around the country.

—Dorie Fain, founder and CEO of &Wealth