Is using a third party a better way to donate your charitable dollars?
There has been a lot of interest this year in “donor-advised funds (DAF),” as a savvy tool for charitable giving. As we head further into the season of giving (and, with it, year-end tax planning), and 2012 thereafter, it might be a perfect time to consider establishing your own DAF.
As a recent Reuter’s article asked, “do donor-advised funds make sense?” They certainly do from a tax standpoint, as you receive a charitable deduction upon giving to the fund, just as you would for giving directly. You then gain the ability to “advise” the fund, along with the other investors, toward worthy charities as you discover them.
The final say comes down to the fund directors themselves, and the other investors may have opinions that vary from your own. It does mean that you can give large amounts of money to charity without already having formulated a specific and exhaustive plan regarding to whom and how much you wish to give.
That said, with some DAFs, there may be other detractions, like the administrative costs. After all, these funds are overseen by the major money-management companies and they will charge fees for the service, usually in relation to the amount of your gift. As the thought goes, being charged for a money-manager to make more money for you is one thing, but to be charged from the money that was to go to a good cause might just be something else entirely. There certainly are those would be philanthropists who don’t like the practice for this reason.
Local “community foundations” are an excellent alternative to the DAFs managed by the for-profit major money management companies. Their fees typically are much lower and the local community itself benefits by being, well, local.
As with anything financial, it is best to do your own due diligence before proceeding. For more reading you can check out the New York Times article from a little while ago written by a Boston College Professor, Ray Madoff: “Tax Write-Off Now, Charity Later”
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Reference: Reuters (December 5, 2011) “Charitable Giving: Do Donor-Advised Funds Make Sense?”