Donor-advised funds

Chas Craig, BridgeTower Media Newswires

Last December we discussed several tax-efficient charitable giving strategies such as clustering charitable gifts into a single tax year, IRA-qualified charitable distributions and donating appreciated property. In that prior column we alluded to the existence of several proactive vehicles for the charitably minded. One such tax-friendly investment vehicle is a donor-advised fund.

With a donor-advised fund you contribute cash or appreciated property (usually stocks) held for more than one year. The contributions yield a tax write-off in the year they are made, and in the case of appreciated property, capital gains tax is avoided. The donor then has the flexibility to designate charities as recipients later. Meanwhile, the assets are invested and grow tax-free, augmenting the donor’s gifting ability.

A donor-advised fund is more flexible and administratively convenient than a private foundation, which requires bylaws, annual meeting minutes, and a tax return and carries a 5% of average asset value annual distribution requirement. Fees are the trade-off for the flexibility and administrative convenience of the donor-advised fund option. Using Charles Schwab’s offering as an example, administrative fees are 0.6% per annum on the first $500,000, with several lower percentage break points thereafter for higher dollar amounts. Please note, many other custodians offer similar donor-advised fund options; our use of Schwab as an example here should not be viewed as an endorsement but simply as a way to add practical context to our commentary.

While the poster children for donor-advised funds are charitable individuals with a concentrated position in a stock for which the tax basis is significantly below market value, many individuals and the organizations they support could benefit from their use. Having said that, maximum flexibility is maintained by simply making charitable contributions out of pocket as contributions to a donor-advised fund, being irrevocable, travel on a one-way street. If the donor expects to make annual grants that are close in value to planned annual contributions, the individual would probably be better off just making charitable gifts out of pocket since the primary benefit of the donor-advised fund is the tax-free growth.

Here are a few more considerations for donor-advised funds at Schwab:

• A core account can be opened with a minimum contribution of $5,000. These core accounts are limited to plain vanilla mutual fund investment options. A professionally managed donor-advised fund option is made available once assets pass the $250,000 mark. Essentially, the professionally managed distinction affords investors the ability to purchase individual securities via using the services of an investment adviser.

• The minimum grant size is $50, and the minimum additional contribution amount is $500.

• Schwab handles all the documentation for grants.

• You must make a minimum of one $50 grant every four and a half years. If you fail to do so, Schwab will make a $50 donation on your behalf to a charity of its choosing.

From an asset allocation standpoint, the optimal allocation for a donor-advised fund is likely to be more conservative than that used for a working individual’s retirement account. Reason being, the presumption of ongoing cash outflows associated with charitable grants shortens the capital’s time horizon relative to a portfolio with a low or zero current spending rate. All else equal, shorter time horizons call for more conservative asset allocations.


Chas Craig is president of Meliora Capital in Tulsa (