Benefits and drawbacks of donor-advised funds

Benefits and drawbacks of donor-advised funds

On Behalf of | Oct 17, 2022 | Charitable Giving, Tax Planning

As you begin your estate planning in New York, you may wonder if donor-advised funds are the way to go. These funds allow you to give valuables to an Internal Revenue Service-recognized charity that you support. Organizations, individuals and families can create these trusts managed by a third party. There are benefits and drawbacks to creating donor-advised funds.

Benefits of creating donor-advised funds

Donors put more than $34 billion into these trusts in 2020 while focusing on creating trusts, charitable giving and tax planning. People and groups putting money into a donor-advised-funds account can take a tax deduction in the year they gave the funds, even if the charity does not receive the money until later. Therefore, they can take advantage of the tax deduction without the individual or group giving the funds naming the charity that gets the funding.

Disadvantages of creating donor-advised funds

While the tax deduction greatly benefits many donors, these funds have some drawbacks. The third party has control of the funds. Therefore, they determine if the funds go where the donor chooses and when charities receive the funds.

Those creating these funds must consider the third-party controller carefully. If the third party goes bankrupt, the federal government can seize the funds as collateral for the company. Furthermore, third-party companies can collect high fees they can spend as they desire to manage the funds. Therefore, you must check for hidden fees before creating a donor-advised fund.

Carefully consider the advantages and disadvantages of donor-advised funds when estate planning. It may or may not be the right move to make depending on your circumstances.

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