Individual donors contributed $319.04 billion to charities in 2023. Almost all donors (97%) cite impact as their main reason for giving, while 56% of donors see tax deductions as a motivating factor to give. Ideally, you can do both!

Thinking beyond “checkbook giving” to leverage more strategic forms of charitable giving will benefit both you and your nonprofit(s) of choice. The right tax-advantaged vehicle, like a donor-advised fund vs a charitable trust, can enhance your gift.

Just like you design your investment portfolio strategy and financial plan to support your personal financial goals, you can design your donor advised fund or trust to meet your philanthropic goals. Here’s what you need to know to decide the best vehicle for your charitable giving.

 

Donor-Advised Fund vs. Charitable Trust: What’s the Difference?

Both donor advised funds and charitable trusts have benefits – for you and the causes that speak to you. Keep in mind that no matter which direction you decide, funding one of these vehicles is irrevocable; you can’t take the money back.

Also, you should name successors to your fund or trust who can continue to manage the money and direct donations if there are any assets remaining after you pass away. The successor advisors or trustees should understand your philanthropic goals, your relationship with specific charitable organizations, and how you approached making an impact.

 

Donor Advised Fund (DAF)

A donor advised fund is an inherently flexible vehicle. You can make contributions to a DAF at any time in any amount, and you can make distributions from the fund at any time in any amount. There are no requirements to make mandatory distributions each year, which means a DAF can be a great option if you want to let your funds grow and make a large transformational gift in the future, as well as if you want to do annual gifting.

The funds in a DAF can only be used for charity; you can not take any funds for the benefit of an individual.

DAFs are also easy to set up and administer. You do not need an attorney to establish the fund documents and you do not need to file annual tax documents for DAFs (an important difference from charitable trusts). You will likely pay an ongoing fee to the organization that administers the DAF.

You will receive a tax deduction in the year you put money in the DAF, even if it doesn’t get donated right away. This can be beneficial if you have a high income year (for example from selling a business or higher than usual compensation) and you want to maximize your tax deduction in the year it will have the most impact using funds you planned to donate to charity anyway. No need to scramble to write large checks to non-profits before year-end; you can put funds in your DAF and take your time to thoughtfully give away the money.

Money in a DAF can be invested for long-term growth, potentially increasing the amount of funds you have to give to charity. DAF’s are tax-free vehicles, so there will be no capital gains taxes on the investment growth.

Charitable Remainder Trust (CRT)

A Charitable Remainder Trust can be a great tool if you’re looking for both income for yourself and a benefit for charity. A CRT is a tax-exempt, irrevocable trust that first distributes annual income to a named beneficiary for a specified period of time, then donates the remainder of the trust value to a named charity.

When setting up a CRT, you will need to choose how long you will receive an income stream. This term can last the length of your life or a certain number of years, not to exceed 20 years. Since you’ll need to have a 5% or lower chance of outliving your trust’s assets in order to receive a charitable deduction, it’s safe to say CRTs aren’t ideal charitable giving vehicles for middle-aged or younger people.

A CRT has more administrative considerations than a DAF. You will incur legal fees to set up the trust, annual administration fees to make sure the trust is administered properly, and annual accountant fees to file the trust’s tax documents (Form 5227).

You are required to distribute at least 5% of the trust annually to the named beneficiary. You can not change the non-charitable income beneficiary once the trust is established.

Your tax deduction will be equal to the present value of the remainder interest left to charity. CRTs can be especially beneficial in a high interest rate environment – a higher Section 7520 rate (used to determine the present value of the income distributions over the life of the trust) can lead to a lower present value of payouts and a higher remainder interest (i.e. tax deduction).

There are many more nuances to be aware of with CRTs, including the difference between the two primary types of CRTs: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). Read more about the pros and cons of each here.

Charitable Lead Trust (CLT)

A Charitable Lead Trust is conceptually the inverse of a Charitable Remainder Trust. It is an irrevocable trust that distributes annual income to a named charitable organization for a specific period of time, then transfers the remainder to a named beneficiary. This can possibly be back to the grantor (the person who contributed assets to the CLT), but it can also be to a third party (typically the donor’s heir/s). Naming a third party can achieve significant wealth transfer goals, since the beneficiary potentially can receive the remaining trust assets free of gift or estate taxes.

CLTs are largely an estate planning tool and don’t necessarily provide the biggest bang for your buck as far as charitable deductions are concerned. However, if you want to fund your charitable giving vehicle using highly appreciating assets, a CLT can be advantageous, since any future appreciation is effectively removed from your estate.

You may be able to take an upfront tax deduction equal to the present value of the payment stream distributed to charity, depending on how your trust is structured; however, any future income and gains in the trust will be taxable.

CLTs are often used by high net worth individuals who do not need the current income from a particular asset. Like CRTs, a charitable lead trust can take the form of an annuity trust or unitrust (CLAT or CLUT).

Choosing Between a Donor Advised Fund and a Charitable Trust

So, how do you decide which giving vehicle is the right fit for your philanthropic giving? Your unique goals and situation may be suited to one over the other. Here are a few things to consider when deciding which one is right for you.

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Other Charitable Options

Of course, donating money isn’t the only way you can make a meaningful impact on the causes you care about. Time and advocacy are equally valuable assets to furthering a non-profit organization’s mission.

 

Serve on the Board

While this is a significant time commitment that shouldn’t be taken lightly, serving on the nonprofit’s board puts you in a position to create a lasting difference in the organization. You can work directly on big-picture initiatives and develop programs you personally connect with.

 

It may also push you out of your comfort zone and force you to learn more about who you are and what you’re capable of – an incredible opportunity for high-performing professionals who enjoy the challenge and accomplishment of working toward their goals.

 

Volunteer

Nonprofits often have a need for individuals with unique professional skills. This can include event planning for major fundraisers, reviewing grant applications, serving on a leadership council, or leveraging your network to find other potential donors.

Volunteering for these much-needed tasks allows you to contribute and support the nonprofit beyond your wallet – all the while benefiting from networking opportunities and connecting with the people (or animals) who are impacted by the mission of the organization.

For more ideas on how you can contribute time and talent to a charity beyond your financial giving, listen to our podcast with Meera Pillai, a retired IT professional turned community philanthropist in the DC Metro Area.

 

Charitable Giving Planning at Monument

What is the legacy you want to leave behind? Many people hope to leave the world better than they found it. Taking a strategic, thoughtful approach to your philanthropy can create many benefits for you and the organizations you want to support.

At Monument, that’s where we specialize – creative problem-solving that turns your goals into an actionable plan. We don’t believe in cookie-cutter approaches or generic advice. Our team of sharp, creative financial professionals collaborates with you to build a wealth strategy tailored to your charitable goals, plans for the future, and current portfolio.