5 Key Points
- DAFs Simplify and Enhance Charitable Giving: Donor-advised funds streamline your donations, offering immediate tax deductions, grant flexibility, and potential investment growth for your philanthropic funds.
- Smart Screening = Meaningful Impact: Evaluating charities ensures your dollars support effective, responsible organizations aligned with your values.
- Charity Navigator: Your Starting Point: While not perfect, Charity Navigator is the most comprehensive review site, offering scores and insights on a wide array of charities.
- Beyond Ratings: Dig deeper into a charity's website, leadership, news coverage, and ask direct questions for a complete picture.
- Maximize Your Giving, Minimize Headaches: Pairing wise charity screening with the flexibility of a DAF empowers you to make a real difference in the causes you care about.
Intro
Donor-advised funds (DAFs) have revolutionized charitable giving, providing a flexible and tax-savvy way to manage and direct your philanthropic contributions. Think of them as your personal charitable savings account – you can contribute cash, appreciated stocks, or even non-cash assets, receiving an immediate tax deduction. Additionally, DAFs allow you to strategically "bunch" donations in certain years to maximize your tax deductions.
Setting up a DAF can be done in a few ways.
The Basic Steps of Setting Up a DAF
- Choose a sponsoring organization: DAFs are typically managed by charitable organizations like community foundations or large financial institutions (Fidelity Charitable, Schwab Charitable, and Vanguard Charitable are the largest, but there are many). Each has its own minimum contribution requirements, investment options, and fee structures.
- Set up your account: This usually involves completing an application form, providing personal information, and signing a donor agreement outlining the terms of your DAF.
- Fund your account: You can contribute cash, stocks, mutual funds, and in some cases, non-publicly traded assets like real estate, private business interests, or cryptocurrency. You'll receive an immediate tax deduction for the fair market value of your contributions. some text
- Note: Contributing appreciated stock to the DAF can supercharge your tax savings by realizing the donation deduction and potentially avoiding capital gains.
The Power of Strategic Grantmaking
Once your DAF is funded, the true power of flexibility comes into play. You can recommend grants to your chosen charities on your timeline. This control over donation timing is particularly valuable for smaller charities. Unlike larger organizations, they might not be equipped to handle large, sporadic donations followed by years of silence.
By recommending regular, smaller grants (e.g., annually), you provide them with predictable resources. This predictability allows them to budget and plan more effectively, ensuring your contributions have a lasting impact. Additionally, regular giving keeps your name on their radar, potentially strengthening your relationship with the organization.
Ultimately, this flexibility is a win-win for both you and the causes you care about. You get to support your chosen charities strategically while they receive valuable, consistent resources that fuel their mission.
Why Charity Screening is Crucial
However, with a vast number of charitable organizations vying for support, how do you ensure your philanthropic dollars have the most meaningful impact? While your heartstrings might naturally guide you, doing some homework ensures your generosity creates genuine and lasting change.
Not all charities are created equal. Some are exceptionally well-managed, transparent, and effective, channeling most of their funds directly to programs fulfilling their stated missions. Others might struggle with high overhead costs, lack of clear goals, or questionable financial practices. Smart charity screening can help you separate the impactful organizations from those that might not be the best stewards of your donations.
Reliable Sources for Charity Evaluation
Several reputable organizations have carved a niche in evaluating charities' effectiveness, financial health, and accountability. In 2019, Consumer Reports did a review of charity review platforms (more on why CR is important later) and recommended three primary resources:
- BBB Wise Giving Alliance (give.org): This organization sets clear ethical fundraising and governance practices standards. While it primarily offers a 'pass/fail' rating based on a charity's willingness to meet its transparency requirements, the BBB Wise Giving Alliance is a valuable starting point for checking a charity's basic trustworthiness.
- Charity Navigator (charitynavigator.org): Arguably the best-known charity evaluation platform, Charity Navigator provides star-based ratings on metrics like financial health, accountability, and transparency. While there's always some debate about weighting the various factors in their scoring system, it offers valuable insights and comparative tools for donors.
- CharityWatch (charitywatch.org): With a focus on exposing questionable practices and inefficient fundraising tactics, CharityWatch provides letter grades along with in-depth analysis and financial reports. If a charity spends more on fundraising than program delivery, CharityWatch is likely to spotlight them.
Understanding the Importance of Consumer Reports
Consumer Reports is a highly respected independent, nonprofit organization with a long history of testing consumer products and services to provide objective, unbiased information. Their expertise in consumer protection and rigorous testing methods extend to their evaluation of charities, making them a trustworthy source for identifying reliable and well-run organizations.
Limitations of Charity Rating Sites
It's essential to remember that charity rating sites aren't perfect. Some valid criticisms include:
- Focus on financial metrics: Many platforms overemphasize financial ratios, which might only sometimes tell the whole story of a charity's efficiency or effectiveness in a particular program area.
- Subjectivity in ratings: The weighting of different factors in scoring systems can vary, potentially skewing a charity's overall rating up or down based on the rater's priorities.
- Limited scope: Not all charities get evaluated, especially smaller or niche ones. Don't rely solely on the absence of a rating to judge a charity.
Going Beyond the Ratings
Charity rating sites are a great starting point but shouldn't be your only avenue of research. Consider these additional ways to screen potential charities:
- Review the charity's website: Look for a clear mission statement, program descriptions, evidence of impact, and audited financial statements.
- Investigate their leadership: Research their board of directors and executive team. A solid and reputable leadership structure is a positive sign.
- Search for news and reviews: Check credible news sources or platforms like GuideStar for any recent articles or in-depth reviews related to the charity.
- Contact the charity directly: Don't hesitate to ask questions about their programs, funding sources, and any concerns you might have.
My Review
I decided to give CR's recommended platforms a try to review the charities Purpose Built donates to (we donate 1% of our topline revenue to environmental and community causes). I used each platform to review three charities, two we donate to and one we have been trying to work with:
The National Park Foundation (NPF): This is the official nonprofit partner of the National Park Service, chartered by Congress to raise private funds to support America's more than 400 national parks.
1% for the Planet: 1% for the Planet is a globally recognized certification that represents thousands of businesses and environmental partners. The organization connects businesses, consumers, and nonprofits, empowering everyone to drive environmental change. Members commit to donating 1% of their annual sales directly to vetted environmental organizations, ensuring a powerful collective impact for the planet.
Friends of Wissahickon (FOW): FOW members volunteer and provide monetary support to help care for the 1,800-acre Wissahickon Valley Park, where I enjoy mountain biking. FOW is a regional charity in Philadelphia and was selected to test how comprehensive the screening tools would be.
Results
BBB Wise Giving Alliance (give.org):
The National Park Foundation (NPF): Did not offer any information on the charity at all. Given the size of NPF and that it was established by Congress, it did not give me a lot of faith in this site right out of the gates.
1% for the Planet: No information.
Friends of Wissahickon (FOW): No information.
Since Give.org failed to have any information on my charities, it is not possible for me to recommend it as a charity screening tool.
Charity Navigator (charitynavigator.org):
The National Park Foundation (NPF): The charity received a score of 98 overall, with separate scores based on different categories, including Accountability & Finance and Culture & Community. Although missing information was noted, they were still able to provide a score based on what they had.
1% for the Planet: The charity received a score of 86 overall, again with separate scores for Accountability & Finance and Culture & Community. Although missing information was noted, they were still able to provide a score based on what they had.
Friends of Wissahickon (FOW): No information.
CharityWatch (charitywatch.org):
This was the only site that required the user to setup account. They have two options, a limited free account and a paid version. I set up a free acccount and the information below is based on it:
The National Park Foundation (NPF): They achknowledge the charity does exist as well as providing an external link to story on work the charity has completed but offers no offically rating or information.
1% for the Planet: No information.
Friends of Wissahickon (FOW): No information.
Closing Thoughts: The Power of Informed Giving
Donor-advised funds and charity screening tools empower you to make smart, strategic donations that align with your values. DAFs offer the flexibility to give when it makes sense for you and your tax situation, while also allowing you to support causes over time. By pairing DAFs with careful charity research, you can ensure your contributions create the most meaningful impact. While no evaluation system is perfect, my experience reinforces the value of Charity Navigator. Its comprehensive reviews and clear metrics make it a reliable starting point for researching potential charities. Remember, giving is incredibly personal, but a bit of due diligence goes a long way in maximizing the power of your philanthropic dollars.
If you have questions about maxiumizing your chariable giving, miniumize taxes, or want to explore how a Flat-Rate Fee-Only structure can help you achieve your goals, schedule a time to talk.
Your financial well-being is too important to leave to chance. Choose wisely.
FAQ Section
Q: What is a Donor-Advised Fund (DAF)?
A: A DAF is a philanthropic vehicle that allows donors to make charitable contributions, receive immediate tax deductions, and recommend grants from the fund over time to their chosen charities. It's like a personal charitable savings account.
Q: Why is charity screening important?
A: Screening helps ensure that your donations are going to organizations that are transparent, efficient, and impactful. It helps you avoid charities that may not use donations effectively or align with your philanthropic goals.
Q: Can I contribute non-cash assets to a DAF?
A: Yes, many DAFs accept non-cash assets, including stocks, mutual funds, and sometimes real estate or private business interests. Contributing appreciated assets can offer additional tax advantages.
Q: How do I choose a charity to donate to?
A: Start by identifying causes you're passionate about. Use trusted platforms like Charity Navigator, BBB Wise Giving Alliance, and CharityWatch to evaluate charities based on their transparency, financial health, and impact. Consider also reviewing the charity's own communications and seeking out independent news or reviews.
Q: Are there any downsides to using DAFs for charitable giving?
A: While DAFs offer many benefits, critics point out that funds can be stored indefinitely without being distributed to charities. This has led to calls for regulations ensuring that DAFs distribute funds within a certain timeframe. However, many donors use DAFs actively, regularly recommending grants to their chosen charities.
Q: How can I ensure my donations have the most impact?
A: Beyond using rating sites, engage directly with charities to understand their needs and how they use donations. Consider regular giving to provide steady support, and use DAFs to manage and plan your giving strategically. Always perform due diligence to ensure your contributions are used effectively.
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