Wealth

The wealthy are using this charitable giving strategy. Here’s why it may work for you too

Matthew Perry attends the GQ Men of the Year Party 2022 at The West Hollywood EDITION on November 17, 2022 in West Hollywood, California.
Phillip Faraone | Getty Images

A new foundation has been established in the late actor Matthew Perry’s name to help others who struggle with addiction.

“Addiction is far too powerful for anyone to defeat alone,” the foundation’s website quotes the late actor saying. “But together, one day at a time, we can beat it down.”

The Matthew Perry Foundation is structured as a donor-advised fund, according to its website, a charitable investment fund that experts say offers certain advantages.

Perry may have chosen to have the donor-advised fund as a beneficiary of his estate, which would have let him donate anonymously, according to Charlie Douglas, a certified financial planner and president at HH Legacy Investments in Atlanta.

Donor-advised funds allow donors to choose how much personal information may be shared when making grants from the funds and how they are acknowledged, according to the website of the National Philanthropic Trust, which sponsors and maintains the Matthew Perry Foundation’s donor-advised fund.

“Among celebrities, the best plans are plans of privacy,” Douglas said.

National Philanthropic Trust, through a spokesman, declined to be interviewed for this article.

How donor-advised funds work

Donor-advised funds allow donors to receive immediate tax deductions for their contributions to the fund.

However, they may choose to grant the money to nonprofits over time, giving them more flexibility when choosing the causes and amounts to which they would like to dedicate their funds.

Many clients and their financial advisors establish donor-advised funds during the estate planning process, which allows for the distribution of the money per their wishes when they pass away, according to Brandon O’Neill, a certified financial planner and vice president and charitable planning consultant at Fidelity Charitable.

Donor-advised fund charitable assets represent 20% of those in private foundations, according to National Philanthropic Trust’s 2023 annual report.

While wealthy donors may have both a foundation and a donor-advised fund, many are moving to just donor-advised funds, according to Douglas. A donor-advised fund comes with fewer restrictions than a foundation, which requires filing of certain tax forms, annual charitable payouts of at least 5% of the value of its endowment and payment of an excise tax on net investment income.

“With a donor-advised fund, what it does is more streamlined,” O’Neill said. “There’s not as much of an administrative burden or oversight that happens with a foundation.”

Donor-advised funds are not limited to just wealthy donors. Some firms may allow for an account to be opened with $0 in initial contributions.

The average size of individual donor-advised accounts was an estimated $117,466 in 2022, according to National Philanthropic Trust, down 3.8% from $122,162 in 2021.

Advantages of using a donor-advised fund

For all donors, regardless of income, there may be benefits to using a donor-advised fund.

For one, if you donate checks throughout the year, it may be difficult to keep track of all the money you have given away during the year when it comes time to report it on your tax return, Douglas noted.

Donor-advised funds offer a way to keep a “running tally,” that lets you see exactly who you donated to, when and where, Douglas said.

A second advantage is that instead of writing checks to give money, donors may instead choose to give to the fund appreciated assets such as stocks, bonds or mutual funds that would otherwise incur capital gains tax when sold, O’Neill said.

“These accounts do have the ability to provide the opportunity for tax-free growth,” O’Neill said. “So that also creates additional funds for charity.”

Another perk is the ability to use a tax strategy known as bunching donations, which allows for the consolidation of donations in a single year in order to maximize itemized deductions.

This tactic has become more valuable since the Tax Cuts and Jobs Act increased the standard deduction until 2025, raising the bar to meet thresholds to qualify for itemized deductions. In 2023, the standard deduction is $13,850 for single filers and $27,700 for those who are married and file jointly.

Although it’s already late November, it is possible to get donor-advised funds open, established and funded by year-end, O’Neill said. But how fast that can happen may vary, particularly depending on where the assets come from, he said.

At Fidelity, O’Neill said, the vast majority of contributions come in the last few weeks of the year. However, it is best to get the process started as early as possible, he said.

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