Do Good With a Donor-Advised Fund

Budding philanthropists can invest their money and give to their favorite charities.

The perfect vehicle for budding philanthropists is a donor-advised fund. Such a fund lets you turn over assets (money, stocks, bonds) to a program run by a financial-services firm, a community foundation or a charitable group. You then advise the program to give to your favorite charities. The program invests your assets, and as they grow, you have more money to grant. You also get a tax deduction in the year you make a contribution.

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Most donor-advised funds offered by mutual fund companies and brokerage firms have high minimum contributions (the average is $10,000). But you can start a donor-advised fund for $1,000 or less through a community foundation.

A community foundation channels gifts from donors to charities in a specific region. More than a third of these foundations have programs that help up-and-coming philanthropists create a donor-advised fund over time, says Doris Heiser, development director for the Greater Milwaukee Foundation, which pioneered the concept. Known as acorn funds or build-a-fund programs, they take contributions until they're large enough to make grants. That threshold is usually $10,000.

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Sue Grans, a human-resources manager in her fifties who lives in Rockford, Ill., has contributed small sums since 1999 to a donor-advised fund sponsored by the Community Foundation of Northern Illinois. She expects her fund balance to pass the $10,000 mark next year. She and her three nieces (ages 19 through 26) will then decide which charities they want to receive grants from the fund. "You don't have to put it off," Grans says. "Little by little, you can make a lasting contribution to charity."

When you open a donor-advised fund, you are actually making an irrevocable gift to the community foundation. That means you no longer have direct control over the gift because you have taken the tax break. You may recommend which charities should receive grants, and the foundation will usually respect your wishes. The foundation will make grants to any IRS-approved charity, even if the charity is outside its focus area.

Each foundation has different limits on how much you can grant per year, but 4% is the standard. To find a community foundation in your area, visit the Council on Foundations' directory at (opens in new tab).

See Philanthropy Made Easy (opens in new tab) to learn more about donor-advised funds.

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Contributing Editor, Kiplinger's Personal Finance