Donor-advised funds are a popular and easy way for many investors to give to charity. Still, some people don't fully understand how the funds work, and that can lead to costly mistakes.
The concept is simple. The donor makes a tax-deductible contribution to the fund. The fund managers, which include some of the biggest investment companies, then carry out a dual mission of seeking positive returns on the assets, while making distributions to charities designated by the donor.
Contributions to the funds themselves are deductible at up to 50% of adjusted gross income, compared with a 30% limit on contributions to some private foundations. The fund's managers take on the paperwork duties, and thus some of the headaches.