Using a Donor Advised Fund for Your Charitable Giving
Donors make charitable contributions to establish a legacy, to share their values with future generations, to support organizations and issues of personal significance, and to secure tax benefits. No matter the motivation, all donors wants to maximize their dollars while supporting the causes they care about. Creating a donor advised fund is one way to do just that.
How Does a Donor Advised Fund Work?
To establish a donor advised fund, you begin by selecting a sponsoring charity. Donor advised funds may be sponsored by independent national organizations, the charitable arm of a for-profit financial services institution, a community foundation, a public foundation, or a specific charity such as a hospital or university. You would then make a contribution of personal assets and name your fund. The minimum amount needed to open the fund and the types of assets that can be contributed varies depending on the sponsoring public charity.
Once the fund is created, the sponsoring charity normally handles all of the administrative responsibilities for a fee, including investing fund assets, vetting donee charities, creating all necessary documentation and maintaining proper reporting and record-keeping. You, as the donor, can then make recommendations to the sponsoring charity about which charitable organizations fund assets may be used to support (typically from the sponsor’s database of IRS-approved or otherwise vetted public charities). Donors typically have the ability to choose what information, if any, is disclosed to grantee charities and may remain anonymous if desired. Donor advised funds are not subject to a legal minimum payout requirement, so you can control how and when grants are to be made. In addition, once a fund is established, the donor may continue to make future contributions to the fund.
Income and Estate Tax Planning
There may be tax benefits to creating a donor advised fund. Upon making a lifetime contribution to the fund, you will receive an immediate income tax deduction of up to 50% of adjusted gross income for cash contributions and up to 30% of adjusted gross income for appreciated assets.
Contributing appreciated property to the fund allows a donor to avoid capital gains tax on property they may later sell. Contribution of any asset provides an immediate, income tax deduction for the fair market value of the asset. Donors may name their donor advised fund as the recipient of the annual required minimum distributions from their Individual Retirement Account as a way to mitigate their lifetime taxable income stream. Similarly, donors may name their fund as a beneficiary of a taxable retirement account to create a charitable deduction for estate tax purposes and to save individual beneficiaries from the income tax burden of retirement distributions.
Contact counsel to learn more about donor advised funds.