Turn your book club into a donor-advised fund club
Turn your book club into a donor-advised fund club

Twenty years ago during the Dot-Com 1990s, when I had a lot more money, I put $50,000 into a donor-advised fund. It felt like the right thing to do. It was a good tax move for that moment. Over time, that money could grow off my books, and I could give that money to non-profits. I couldn’t see then that the coming decade, the Zeros, would be the worst stock-market decade in a century. I won’t lie–there were plenty of times when I’ve wanted that money back for myself. But now, twenty years on, using a donor-advised fund is one thing I’m glad I stuck out.

How A Donor-Advised Fund Works

I previously wrote about using force multipliers when you donate to charitable causes. I think donor-advised funds are one of the best force multipliers available for charitable giving.

A donor-advised fund is like a brokerage account for the benefit of charities. You deposit money into your account and select how you want it invested. Thanks to the power of compounding interest, your money grows. You withdraw money from the account by recommending a grant to a qualified nonprofit organization. You tell the fund management how much you want to donate and what investments in your account you want to sell to pay for your grant.

Because the donor-advised fund is itself a nonprofit, you can qualify for a tax deduction when you fund your account. You don’t pay capital gains taxes on the money your donor-advised account earns.

According to the National Philanthropic Trust, donor-advised funds are big business in the land of nonprofits:

  • There were 284,965 donor-advised fund accounts in 2016.
  • Donor-advised funds held $85.15 billion in assets in 2016.
  • Annual contributions into donor-advised funds were $23.27 billion in 2016.
  • Donors recommended grants from donor-advised funds totaling $15.75 billion to charities in 2016.
  • Average donor-advised fund account size was $298,809 in 2016.

Investment companies such as Fidelity, Schwab, and Vanguard offer donor-advised funds. Community foundations such as Silicon Valley and Kansas City offer them as well.

Rules vary among the funds. I use Fidelity. Their minimum to open an account is $5,000. The minimum grant you can make out of your account to a nonprofit is $50.

How I Use My Donor-Advised Fund

When I started my donor-advised fund, I was scattered and supported all sort of things. Then, the economy went south, and my fund began to shrivel. I felt the need to regroup and rebuild. In 2011 and 2012, I gave no money from the fund.

When I had regained my base in 2013, I stuck myself on a strict budget of donating $2,000 from my fund per year. This discipline has been great practice for when I retire and need to hold to a constant withdrawal rate to fund my retirement. (More about retirement withdrawal rates in a future post.)

Now, I give grants to just one or two organizations a year. My recipient(s) may change over time. My wife donates half of our fund contributions to causes she wants. So far, she always picks the meditation center that she attends.

I treat the donor-advised fund as a separate project. I still donate money out of my checking account to organizations that I support.

After 20 years, I’ve given away 96 percent of my original donation into my Fidelity account. Here’s the breakdown of what types of nonprofits I’ve supported, by sector:

At the same time, the value of my account has grown by 35 percent.  I’ve been consistent about investing 80 percent of the fund in US stocks, 10 percent in international stocks, and 10 percent in fixed income. I use the stable and low-risk fix income portion to pay my grants to nonprofits. Currently, I have enough in fixed income to fund three to four years of grants at my current budget.

I don’t say any of this to brag. My fund is tiny compared to the average donor-advised fund of nearly $300,000.  Still, I am proud of the extra giving I’ve been able to do with the help of Fidelity and the power of time and patience.

What I’ve Learned

My first lesson was sticking to a budget, even in giving. Early on, I was on my way to killing my fund. It was only by sticking to a budget that I’ve been able to continue giving and growing.

Focusing my efforts–a type of budgeting of attention–was my next lesson. As I wrote in my previous post about charitable giving, concentrating your efforts helps you have more impact and gain more expertise over time. Don’t just take this from me, though. Sean Parker, the young billionaire from Napster and Facebook, has excellent advice about focus and charitable giving.

The lesson I’m currently learning relates to the first lesson on budgeting. Because my fund has grown in value by 35 percent since when I started, I might have the chance to be more dynamic about how much I give. How do I handle that? I could increase my set annual amount by 35 percent and keep going. I could base next year’s annual budget on 4 percent of my fund’s balance at the end of the current year, or index it to inflation. I’m not sure which way to go. Part of my indecision stems from not defining what role growing the value of my fund plays in my charitable giving.

Making Donor-Advised Funds a Group Sport

Even the $5,000 minimum at Fidelity can be too much for one person to give all at once. One way around that is making a donor-advised fund into a group activity. Do it with your book club, or instead of a book club. You and four compadres could agree to contribute $1,000 each every year for five years. Boom! You’re now a private foundation. Pick a name and make t-shirts. Group members can participate in grant research, selection, and volunteering. Along the way you can learn about investing and the cause you support.

If you and your friends gave away $1,000 every year while doing this, and you earned seven percent on your fund, you’d have $24,613 at the end of five years. In your sixth year, you could stop donating money if you want, and donate $1,000 annually from the interest you earn. Your fund would also continue to grow.

Here’s a quick ballpark calculation of how the numbers would look:

Limitations to Donor-Advised Funds

Donor-advised funds do have limitations.

  • Because the fund is a nonprofit, once you donate your money you can never get your money back. Be sure that you won’t need that money in the future.
  • Investments in your donor-advised fund face the same market risks as similar investments not held in a donor-advised fund.
  • You can grant money only to other non-profits.
  • You can’t receive more than incidental personal benefit from your grant.
  • Grant money can’t be used satisfy a legally-binding obligation you’ve made to a nonprofit.

Some people, like this article writer in the Denver Post, complain about money sitting in donor-advised funds. This particular writer’s main concern seems to be money sitting around inside of going to nonprofits. He claims that

With no payout requirements, donors receive immediate tax deductions but funds can sit dormant for years.

I don’t get this. Because of the donor-advised fund and the power of compounding, I’ll give several times more money over my lifetime than I otherwise would. Yes, my money needs to sit somewhere to grow. That’s how compound interest works.

I can’t speak for all donor-advised funds, but I know that Fidelity does have required donation and activity levels (spelled out in their guidelines). In particular, if my account is inactive for three years, Fidelity will come looking for me.

Even with the limitations, donor-advised funds are one of the best force multipliers I know for charitable giving. Consider changing up how you donate money to take advantage of compound interest for the greater good.

 

(Image courtesy of Flickr)

Use Donor Advised Funds to Compound Your Charitable Giving
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