A donor-advised fund may sound like something that’s only for the ultra-wealthy, but it’s actually accessible to anyone who makes charitable contributions. The donor-advised fund is one of the most tax-efficient ways to donate money to charity, which has helped it become the fastest-growing charitable giving vehicle in the U.S., according to Fidelity Charitable.
A donor-advised fund is a charitable-giving account that allows a donor to provide grants to a charity over a period of years. They can be relatively inexpensive to create and maintain, and a donor-advised fund offers donors some ability to manage their tax situation through giving. The fund can also be invested, so it can grow while you’re deciding which charities to support.
Here’s how a donor-advised fund works, why it may be an attractive option for giving and some key benefits it has over a charitable trust.
How a donor-advised fund works
With a donor-advised fund, an individual makes a charitable donation to a fund sponsor, such as a nonprofit foundation or an investment firm such as Charles Schwab or Fidelity Investments. The donor takes a tax deduction in the year the initial fund was established, and then the money can be distributed in subsequent years by the fund sponsor under the advisement of the donor.
Think of the fund like a tax-free pot that holds charitable donations, says Richard Mills, an estate planning attorney at Smith Haughey Rice and Roegge, a law firm in Michigan.
Would-be donors should know that once the fund has been created, the money can’t be taken back. When the fund is established, the donor creates the rules for how money is gifted. But technically the sponsor controls the fund and the donor’s advice on what to fund is non-binding.
“That said, it is rare for the sponsoring organization’s board to exercise its variance powers and disregard the advice of the donor,” says Mills.
“The funds that are not granted out each year can be invested and grow over time, making it possible for an initial charitable gift to a fund sponsor to eventually yield far more than that initial gift in total gifts going to end-use charities,” says Jeff Hamond, vice president and director of philanthropy at Van Scoyoc Associates, a government relations firm in Washington, D.C.
But to squeeze a tax advantage out of these funds, you’ll need to itemize your deductions, and that means having deductions that exceed $27,700 for a married couple or $13,850 for an individual taxpayer in 2023. If you don’t reach at least those thresholds, the donor-advised fund provides no net tax benefit. The thresholds rise to $14,600 for individuals and $29,200 for a married couple in 2024.
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