Many would-be philanthropists struggle with choosing which charity will be on the receiving end of their giving. Complicating this choice is the fact that an organization that makes sense for your client right now might not be the optimal choice forever, nor for all of the client's donated money.

Thankfully, there is a relatively simple solution that provides generous souls with a tax-deduction on deposits made today, as well as the freedom to slowly dole out the dough during future years.

Here is why donor-advised funds may be the best charitable-giving technique that (most of) your clients have never heard of.

Foundations For Regular Folks

Donor advised funds (DAFs) are akin to the gajillion-dollar foundations established by the Gates and Buffetts of the world. Yet unlike those foundations, DAFs can be funded with sums starting in the mid-four figures, and don't require nearly as much administrative hassle.

The sponsoring organizations are typically financial-services companies, charities or community foundations. There are currently tens of thousands of individual donor-advised fund accounts, with roughly $21 billion in assets in 2006, according to the National Philanthropic Trust (NPT).

Yet even though the NPT calls DAFs “the fastest growing charitable-giving vehicle,” a recent survey conducted by Fidelity revealed that 70 percent of six-figure investors were completely ignorant of the idea. And only 3 percent of respondents had used a DAF in the past.

Which is a shame, because there may not be a more flexible and friction-free method for the moderately wealthy to give money away.

Easy In …

To establish a donor-advised fund, your clients must make an irrevocable deposit with one of several dozen sponsoring funds. The minimum initial deposit is typically between $10,000 and $25,000, but Fidelity and Schwab recently lowered the minimum initial deposit required by their respective DAFs to $5,000.

Cash is certainly accepted, but clients may prefer to donate highly appreciated assets instead. That way the donors still get a deduction, but won't owe any capital gains taxes when the charity sells the aforementioned assets.

Whether from straight cash or sales proceeds, the money is usually then reinvested into a sub-account chosen by the donor. The benefactor can also use this opportunity to name successor managers, or pick a charity to receive any funds left over when the donors die.

… And Slowly Out

Where DAFs really shine in comparison to just forking over funds to a particular charity is the flexibility inherent in the questions related to “when” and “how much” must be siphoned off the fund to a qualified organization.

Unlike private foundations, there is no IRS requirement that a minimum amount of money be distributed from an individual donor-advised fund in a particular time period.

So your client can make a tax-deductible donation this year of say, $100,000 to a DAF. But she might only choose to only peel off a few thousand of that amount to a favorite charity now, and leave the rest to multiply for future benevolent endeavors.

Once the individual DAF is established, your client may make subsequent contributions to the same account in amounts as little as a few hundred bucks.

Who Gets How Much

The minimum increments in which money can be distributed from a donor-advised fund are usually even lower than what is required to make a deposit. Although the entire account balance can usually be liquidated at any time, most funds allow donors to recommend distributions of $500 or less.

For a distribution from a DAF to remain kosher, the donor cannot use the money to fulfill a previous commitment, nor can he receive any tangible good in exchange for the donation.

Most DAF sponsors will not only provide guidance to assist your client in choosing a charity, they may even ensure that the recipients use the money in a way in which both your client and the IRS will approve.

Although the money cannot be given to specific individuals, most public charities and 501(c)(3) non-profits qualify as recipients. It may be possible for your client to stipulate that an allocation from his DAF should only support certain activities of the receiving organization.

Keep in mind though, that these are donor-advised funds, not donor-dictated funds. Although the sponsor of the fund will certainly incorporate your client's wishes when deciding who will get any disbursements, the sponsor retains the final say-so in the matter.

One method of control that your client can retain by using a donor-advised fund is to insist that any money coming from his particular DAF be donated anonymously (or he can ask that his generosity be shouted from the roof-tops).

Some Extra Scrutiny

All the intrinsic flexibility and potential anonymity offered by donor-advised funds has caused the government to sit up and take notice of the strategy. The Pension Protection Act of 2006 provided the first true definition of the vehicle, and that was just the first step of inquisition.

The PPA also requested that the IRS begin examining the benefits and drawbacks of allowing DAF donors so much input into which charities get disbursements, how donors might be benefiting from those grants, and whether there should be a minimum annual grant required from each individual donor-advised fund.

The IRS is heeding the call, and according to The Chronicle of Philanthropy, 2008 will mark a big upswing in how closely the agency examines money going into, and coming out of, donor-advised funds.

Getting Your True Reward

As you review how you might benefit from discussing donor-advised funds with your clients, you may discover a slightly disheartening fact: DAFs alone aren't going to make you rich.

Although some RIAs may be able to send clients an asset-based fee bill for money held in a DAF, there are very few sponsoring organizations that offer the opportunity for traditional financial advisors to earn traditional commissions on deposits to, or assets in, the accounts.

Franklin Templeton's Charitable Giving Fund does offer brokers an annual payout of 0.65 percent to 1.00 percent of annual assets held by the advisor's clients (depending on the investment strategy chosen). But the vast majority of the other largest donor-advised funds ask that you serve the greater good by foregoing any pay for your efforts.

It's true that advising your clients on the ifs, ins and outs of donor-advised funds won't do much for your pocketbook immediately. But at least the pro bono work will allow you to add “philanthropist” to your own professional description. And it will keep your philanthropically-oriented clients happy.

Writer's BIO: Kevin McKinley CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid a Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. You can reach him at