There’s a common belief that the federal tax cuts for charitable contributions have been eliminated, but that’s not the case at all. However, that doesn’t mean that all contributions are created equally. Different methods of giving can vary wildly, both in terms of how much money they can save donors and how much good they can do for charitable organizations. One method that’s gaining new ground is the donor-advised fund. It brings a number of distinct advantages, but you should understand the strengths and weaknesses before investing.
Donor-advised funds essentially serve as trust funds that are under the care of the charitable organization of your choice. You can make contributions into the fund at a designated rate, and the fund itself will gather interest and grow over time. When it finally matures, it can be contributed as a donation to the charitable group. These types of funds aren’t new, but they have exploded in popularity recently. The valuation of donor-advised funds has actually grown from $45 billion to $85 billion between 2012 and 2016.
While many of these funds are overseen by financial institutions, that isn’t a necessity, and donors have a lot of flexibility in how they decide to contribute. Contributors may make donations ranging from cash to securities to even real estate and other physical assets. Any type of asset that the charity accepts can be accepted in a donor-advised fund, providing more flexibility than you’d find with a number of other options. Another advantage is that these types of funds allow contributions from multiple individuals, making it ideal for families or groups of friends all committed to the same cause.
These strengths make it easy to contribute to charity, but they also make it easy to make the most out of your tax refund. The fund itself is considered a public charity, so individuals can frequently receive a larger deduction on their return. All in all, those who donate to donor-advised funds can reap the advantages of three different tax breaks. In addition, for the direct tax deduction you get from a charitable contribution, you can also get an exemption from capital gains tax on appreciated securities and a high cap on the portion of deductible cash gifts.
All these things combine to make donor-advised funds one of the best options around if you’re looking to contribute to charity, but you should carefully evaluate your options and make sure that you understand the options available to you before making a commitment.