Is a Donor-Advised Fund Right for You?
A look at some of the pros and cons of these increasingly popular investment vehicles.
Question: What is a donor-advised fund? Should I be using one instead of donating to charity directly?
Answer: It depends. Donor-advised funds can offer some advantages over donating cash directly, but it's a good idea to weigh their pros and cons before deciding if they make sense for you.
What Is a Donor-Advised Fund?
Donor-advised funds have become increasingly popular in recent years--as measured by both the number of accounts and the account size, according to data from the National Philanthropic Trust. Donor-advised funds are investment vehicles administered by public charities; for example, Fidelity Charitable administers a donor-advised fund for Fidelity, Schwab Charitable administers the Schwab Charitable Fund, and Vanguard Charitable administers a donor-advised fund for Vanguard. (National and local organizations not connected with financial institutions also administer donor-advised funds; these funds are often set up to benefit a specific charity or region.)
Immediate tax benefits, payout flexibility
Perhaps the biggest advantage is the ability to make donations to the account and receive immediate tax benefits for doing so while being allowed to disburse the money from the accounts according to your own timetable. In other words, you can choose to pay out a donation to an approved charity right away, or invest the money in the donor-advised fund account and let it grow tax-free until you want to pay it out; either way, you get an immediate tax deduction. At the same time, you retain advisory privileges over how the account is invested, and how the fund distributes money to charities.
Karen Wallace does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.