Have you heard the ancient legend about a ruler who wanted to reward one of his servants for their incredible bravery? The story goes that when the ruler asked the servant what they desired, the servant made a surprising request: grains of rice. Specifically, one grain of rice for the first square of a chessboard, then double the amount for each subsequent square.
The ruler, thinking the request to be modest, agreed. What he didn’t realize was that by doubling each previous square’s contents over 64 squares, he was promising the servant over 18 quintillion total grains of rice!1
I love this legend because it shows the power of exponential growth. For that reason, it’s common to see the story as an object lesson for investing.
Today, though, I’m sharing it for a different reason:
The power of charitable giving.
When it comes to charitable work, the impact of even a single donation is often quite a bit larger than it may seem. When a single life is changed, that person can go on to affect even more lives. Each change creates a ripple effect that can be as exponential as grains of rice on a chess board.
But how to ensure your charitable giving actually has this kind of effect? How can we create the biggest impact on our community? It’s a question I am frequently asked. So, to answer it, I wanted to write to you about the benefits of a donor-advised fund.
If you’ve never heard of a donor-advised fund, it is a type of investment account designed specifically to help people support charitable organizations they care about. Any contributions you make are tax deductible, and the money in that fund can then be granted out over time to the organization(s) of your choice.
How can this type of fund make a chess-board-sized impact?
Take the example of the Salwen family. Back in 2008, they decided to sell their mansion in Atlanta and downsize to a home roughly half the size. That in itself is not so remarkable. What was remarkable is that they decided to donate half of the sale to charity.
When they found a cause, they contributed to a donor-advised fund. They called their fund Hannah’s Lunch Box Fund. (That’s a nifty feature of a donor-advised fund; you can name it whatever you want!) Today, the Salwens still grant money from this fund to various projects. For example, their fund often provides education and materials to villagers in impoverished countries on how to become self-reliant. This has impacted hundreds of lives.2
That’s why a donor-advised fund is so powerful when it comes to charitable giving. It’s a way of being able to continuously support the causes you care about, because the money in the fund can grow over time andbe distributed whenever you choose. While a side benefit, it’s also a way to control your own tax burden, because the contributions you make to the fund are always tax deductible.
The way I see it, there are seven benefits to forming a donor-advised fund.
1. You get an immediate tax deduction for your contributions.
2. The money in your fund can be invested and grow, tax-free, over time.
3. You control how the money is invested within the fund.
4. By putting all your funds for charitable donations into one account, it can simplify the donation process.
5. You have control over when you grant money from the fund. You could contribute today and then grant money from the fund five years from now if you wanted.
6. The fund can be a great way to create a lasting philanthropic legacy for yourself, or to recognize a loved one’s legacy if you choose to name it after them.
7. Finally, your fund can contribute to and support multiple charities.
There you have it. Seven reasons to investigate a donor-advised fund. It is a convenient and powerful way to give back to our community. And when we give back, the funds we donate can have the impact of doubling the grains of rice on a chessboard.
What could be a greater legacy than that?
If you’d like to learn more about setting up a donor-advised fund, or have other questions regarding your charitable contributions, please let me know. We are always here to help you pursue your goals, cement your legacy, and put a little more good into the world!
Donor Advised Funds have fees and expenses that donors giving directly to a charity would not face. Once funds are contributed, the donor no longer has direct control over them. The donor can make recommendations regarding their use, but the final decision rests with the DAF.
All investing involves risk, including the possible loss of principal and there is no guarantee that any investment strategy will be successful. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax professional.
1https://www.mathscareers.org.uk/the-rice-and-chessboard-legend/
2https://www.ncfp.org/knowledge/donor-advised-fund-impact-story-giving-up-a-lifestyle-to-give-back/