If you're looking to make a charitable donation, consider donor-advised funds — just make sure you do your research first.
Donor-advised funds help simplify the giving process. Donors can open accounts at many brokerage firms or large foundations, and then make gifts of cash, marketable securities, and even hard-to-value assets.
In return, donors receive an immediate income-tax deduction. Afterward, the fund disburses money to charitable organizations that you designate. One of the pluses of these accounts is that unspent funds continue to grow tax-free.
Charity is a big business. Donor-advised funds accounted for $78.64 billion in charitable assets in 2015, up 11.9 percent from 2014, according to the National Philanthropic Trust. Generous individuals socked away $22.26 billion into these funds last year, up 11.4 percent from 2014.
But not all donor-advised funds are the same. You may run into hurdles when donating certain assets and your fund may impose restrictions on who receives grants.
"There are multiple layers if you want to give to a donor-advised fund," said Charlie Douglas, partner and director of wealth planning at Cedar Rowe Partners in Atlanta. "It can vary depending on the outfit."
Asset expertise
The fastest and easiest way to give to charity is to write a check to the organization, but cash isn't necessarily the most effective asset to donate.
Rather, gifting highly appreciated stocks allows you to save on capital gains taxes that you would have otherwise incurred if you sold those securities and handed over the cash. You also get the immediate advantage of an income-tax deduction that you can take in the year you made the donation.
This is more complicated if you're giving assets that are harder to value, such as collectibles, or a stake in a small business that you own.
See below for details on donor-advised fund asset growth. They surpassed $78 billion last year.
The hitch is that obtaining valuations for these investments isn't necessarily a speedy process, and moving those complex holdings can take time.
"For stock (in a private business), you'll have to get the approval of the charity," said Marguerite Griffin, national director of philanthropic services at Northern Trust. "If you have to get a valuation, that can take a long time."
Control over grants
When you give to a donor-advised fund, you tell its sponsor how you would like to see the grants made.
The catch is that you're only making a recommendation, and not a mandate. The final say on how to make those distributions is up to the sponsor.
This is especially the case if you recommend a grant in support of a non-profit whose mission runs counter to that of the organization sponsoring the fund.
"I advise the administrator as to where the grants should be made," said Brian Raftery, a New York-based partner in the trusts, estates and wealth preservation practice at Dentons. "The administrator will follow my advisement, but they aren't required to do so."
Further, while private foundations are subject to an annual payout of 5 percent of the market value of their assets, donor-advised funds aren't held to the same rules.
Direct and local impact
If you have a particular cause that's near and dear to you, consider a donor-advised fund that's offered through a community foundation, which are charitable organizations with a local focus.
These groups generally work with local non-profits, and can give you guidance on which organizations are the most effective.
"Donor-advised funds that are sponsored by a community foundation tend to have a more singular focus and they're on the local pulse of charitable activity," said Gavin Morrissey, managing partner at Financial Strategy Associates in Needham, Massachusetts.
Know your fees
Finally, it costs money to give money.
Some donor-advised funds require minimum amounts for opening accounts, subsequent contributions and charitable granting.
Further, your donated assets are subject to investment and administrative fees. How much you'll be charged will vary from one sponsoring organization to another. Some organizations will offer discounts for large gifts, or charge tiered fees that go down as your balance in the fund grows.
For the largest donor-advised fund sponsors, a $100,000 fund can incur administrative fees as high as 1.25 percent of the balance annually, according to the National Philanthropic Trust. Investment fees can be as high as 1.5 percent of the invested assets each year.
Certain services can add an extra layer of expenses. The additional cost of making an international grant, for instance, averages around $1,500 per grant, according to the Trust.
"The fees you're paying are taken from what you'd be able to contribute to the charity, so you want them to be competitive," said Griffin of Northern Trust.