Those who want to establish a legacy of charitable giving have more options than ever before — but there’s a lot to navigate when it comes to the pros and cons of every charitable option. The most popular giving vehicles are donor-advised funds and charitable trusts, but which one is the best for your charitable giving needs?
Let’s examine the benefits of a donor-advised fund vs. a charitable trust.
What Is a Donor-Advised Fund?
A donor-advised fund is a charitable investment account that lets donors make charitable gifts as frequently as they would like.
These funds are “donor-advised” because, in exchange for the donor’s charitable gift to the sponsoring charity, they can recommend how their funds are invested and which charities will receive payments.
The donor’s contribution comes with immediate tax benefits and is deposited into an account managed by a sponsoring charity so it continues to grow in value. As the fund accrues value, payments are granted out to qualified charitable organizations.
Donors are able to make gifts directly to the sponsoring charity that maintains their donor-advised fund account and, in return, receive an immediate charitable deduction for their donations.
Considerations When Setting up a Donor-Advised Fund
A donor-advised fund is a great solution for anyone who:
- Is subject to paying capital gains taxes on appreciated assets
- Has an estate that is subject to taxes
- Wants an easy way to give to multiple charities
- Wants to involve their family in philanthropy
In general, donor-advised funds are a good fit for individuals, corporations, foundations, and trusts. Donors can recommend that grants be immediately distributed from the account or set-up recurring grants, which is a favorite feature of donors who tithe.
Donors who want to involve their family in giving can grant family members advisory privileges. This also fosters a legacy of giving that allows the donor-advised fund to continue beyond the life of the original donor.
Donor-Advised Fund Advantages and Limitations
Advantages
- Donors are eligible to receive tax deductions on both donations of cash and appreciable assets.
- Most sponsoring organizations support a range of investment options for the donor-advised fund, offering greater choice and flexibility for tax-free growth.
- Unlike some funds and trusts, there is no startup cost for the donor to establish a donor-advised fund.
- Information on gifts given to donor-advised funds are not publicly available, so donors have the possibility of anonymous gift giving.
- In comparison to other charitable trusts, there are no required distributions, giving donor-advised funds greater flexibility in the types and frequency of disbursements as well as which charities can receive them.
Limitations
- There’s no income stream for the donor or their designated heirs, unlike some other charitable trusts.
- The donor doesn’t have full control over investments and grant requests, and all recommendations must be approved by the sponsoring charitable organization.
- The donor can’t recommend grants be given to individuals or organizations that are not approved 501(c)(3)s charities.
- Once established, the donor-advised fund can’t be converted to a private foundation.
- Some small fees may apply when setting up the donor-advised fund.
What Is a Charitable Trust?
A charitable trust is an irrevocable trust that can’t be changed or canceled after it has been established. Charitable trusts can liquidate an asset to create one of two types of interest to be paid to charity: income interest in a charitable lead trust or remainder interest in a charitable remainder trust.
A charitable lead trust’s income or lead interest is what is granted to a charity. The trust’s remainder interest either comes back to the donor or passes to some other non-charitable beneficiary, typically the donor’s heir, at the end of the trust’s term.
A charitable remainder trust’s income interest is paid out to a designated beneficiary for the lifetime of the beneficiary or until the conclusion of a set term, after which the remainder interest is passed on to a qualified organization of the donor’s choice as specified in the trust document.
Considerations When Setting Up a Charitable Trust
Charitable trusts are good fits for anyone who is subject to paying capital gains taxes on appreciated assets, has an estate that is subject to estate taxes, would like to benefit charity, and would like to establish a steady income for themselves or another party.
A charitable trust is often used by individuals who have a significant income event or anticipate high estate and gift taxes in transferring their wealth to heirs. Setting up a charitable trust does require the services of an attorney, which costs additional time and money.
It’s important to understand that the different types of charitable trusts have unique requirements or guidelines. For example, charitable remainder trusts are limited in the amount of the income tax deduction that can be claimed. With charitable lead trusts, payments must be made annually, regardless of whether there is sufficient trust income available.
Charitable Trust Advantages and Limitations
Advantages
- Both charitable lead and charitable remainder trusts allow for the donor to make a current income tax deduction.
- Both types of trusts are also not generally subject to gift or estate taxes, making them effective means of passing assets to heirs at a reduced tax rate.
- Both trusts allow the donor to have full control over which individuals or organizations receive grants.
- Charitable remainder trusts allow appreciated assets to be sold free from the erosion of capital gains tax, generating more steady income for designated beneficiaries.
Limitations
- Establishing a charitable lead trust or remainder trust will require the services of a lawyer, which means paying additional fees or expenses.
- In addition to the lawyer’s fees, there may also be annual administration fees to manage the charitable trust.
- Information on gifts given to charitable trusts are publicly available and so they can’t be given anonymously.
- Charitable remainder trusts have required distributions that must be paid, even if the fund itself lacks the assets to make the payments.
- Once the charitable trust is established, the recipient of the disbursements can’t be changed.
Interested in determining a deduction for a charitable trust? Use our gift calculator to estimate the federal income tax deduction for a donor(s) based on specific parameters.
Donor-advised Fund vs. Charitable Lead Trust vs Charitable Remainder Trust
| Donor-Advised Fund | Charitable Lead Trust | Charitable Remainder Trust | |
| Anonymity | Yes, if desired | No | No |
| Annual Minimum Distribution | No | No | Yes |
| Can change which charities receive grants | Yes | No | No |
| Donor Control | May make recommendations only | Full control over grants | Full control over grants |
| Grant Recipients | 501(c)(3) organizations | Individuals or charitable organizations | Individuals or charitable organizations |
| Management and Administration Fees | Yes | Yes | Yes |
| Set-Up Fees | No | Legal and accounting fees | Legal and accounting fees |
| Start-Up Time | Immediate | Weeks or months | Weeks or months |
| Tax Deductions as a % of Adjusted Gross Income | 60% for cash30% for appreciated assets | 60% for cash30% for appreciated assets | 60% for cash30% for appreciated assets |
| Tax Exempt | Yes | No | Yes |
Interested in Establishing a Legacy of Giving? Consider Your Options with Ren
Depending on a donor’s financial situation and philanthropic goals, either a donor-advised fund or charitable trust can be great options. In fact, donor-advised funds can be set up as the charitable beneficiary of a trust to streamline the giving process and provide flexibility in which beneficiaries can receive grants.
Reach out to one of our specialists to further discuss the different possible charitable options.
Donor-Advised Fund and Charitable Trust FAQs
Who can open a donor-advised fund and charitable trust?
Individuals, families, companies, or foundations can open a donor-advised fund or a charitable trust. But, those interested in opening a charitable trust will need the assistance of an attorney. Speak with one of our experts to see how you can get started.
What assets can I donate to a donor-advised fund or charitable trust?
You can donate either liquid or illiquid assets (such as real estate, buildings, antiques, and equipment) to donor-advised funds and charitable trusts. S corporation stock and mortgaged real estate are generally not acceptable funding assets.
For charitable trusts, non-liquid assets may need to be sold or coupled with a cash donation to ensure that the trust has adequate resources to make all the required payments.
How much do I need to start my donation?
The actual amounts needed to establish a donor-advised fund or charitable trust will differ, which is why it’s important to seek the advice of a consultant like Ren for full details on specific requirements.
What’s the difference between a grantor lead trust and a non-grantor lead trust?
With a grantor trust the donor is the beneficiary of the assets remaining at the end of the trust’s term. However, with a non-grantor lead trust, the remaining assets are distributed to a beneficiary other than the donor.
Grantor lead trusts provide an immediate income tax charitable deduction and are more suitable for a donor who experiences a significant taxable income in a specific calendar year. The non-grantor charitable lead trust is a better fit for donors who seek to reduce their tax burden for the long-term by eliminating gift or estate taxes.
For more detailed information on these differences and which option might be the most beneficial to you, talk to one of our specialists.
