Many vehicles exist for charitable giving, but one of the simplest and fastest-growing methods is the donor advised fund. A donor advised fund allows the donor an immediate tax benefit as well as the opportunity for continuing involvement in the charitable giving process, including the opportunity to further give to their fund through their estate plan.
What Is a Donor Advised Fund?
A donor advised fund is an account a donor establishes with a sponsoring organization. The donation is immediately tax-deductible to the donor. While the donation is irrevocable, the donor retains some right to advise the sponsoring organization on how and when to distribute the funds to the donor’s desired charities.
Several different types of IRS 501(c)(3) non-profit organizations offer donor advised funds, including financial firms, religious organizations, independent organizations, and community foundations. The sponsoring organization handles the administration of the fund, leaving few responsibilities to the donor other than advising on how, when, and to whom to make grants.
Advantages of a Donor Advised Fund
A donor advised fund is a relatively simple charitable vehicle, and it has several benefits:
- Easy to establish: A donor advised fund can often be set up with a sponsoring organization over the phone or online.
- Immediate and continuing tax advantages: A donation to a donor advised fund is immediately tax-deductible up to 50% of the donor’s adjusted gross income. Additionally, the donor is not subject to estate tax on the assets.
- Donor’s opportunity for continued involvement: Although the sponsoring organization has legal control over the assets in a donor advised fund, the donor can retain the right to advise the sponsoring organization on investing the assets and on the decisions regarding the timing, direction, and amount of future charitable grants.
- No minimum payout requirements: Unlike private foundations, which must distribute five percent of their annual assets, a donor advised fund has no minimum payout requirement. This freedom allows the donor time to consider when and where to direct charitable giving.
- Allows anonymous donations: Charitable giving from a donor advised fund easily allows the donor to make grants anonymously. And for further distance from the donation, the donor can work with a law firm to set up the donor advised fund on the donor’s behalf.
- Allows cash and non-cash donations: A donor advised fund can be established with a donation of cash or non-cash assets, such as appreciated stock, real estate, or art. Using a donor advised fund also helps convert non-cash assets into cash, something some smaller charities may not be well-equipped to do.
Choosing a Donor Advised Fund Sponsoring Organization
Once a donor has settled on a donor advised fund as the method for charitable giving, the next – and very important – step is choosing a sponsoring organization. A donor should seek a sponsoring organization that contribute to causes the donor values, but there are practical considerations to be addressed as well:
- Donor advice history: A key feature of the donor advised fund is that the donor can retain the right to advise on charitable giving despite having given up legal control of the donated assets. But the donor retains the right to advise, not direct. Investigate the sponsor organization’s record for following donor advice. Sponsoring organizations seek to strike a balance to encourage charitable giving under their administration, but some may be better at this than others.
- Minimum investment and balance: Sponsoring organizations often have a minimum initial investment threshold for donor advised funds and a minimum balance requirement. The donor should choose a sponsoring organization with requirements that do not exceed the donor’s charitable giving budget.
- Investment options and yield: Find out what investment options the sponsoring organization offers and the extent to which the donor is permitted to advise on those investment options. Also key is the sponsoring organization’s record on growing or maintaining the value of the donated assets.
- Fees. A donor advised fund is subject to fees to cover the cost of administration. Compare the fees of the different sponsoring organizations for donor advised funds to find out how much of the donated assets are actually passed through to the charitable causes. Some donors become sorely disappointed when the fees related to their donor advised funds surpass the return on their investments in a given year.
- Transferability: Find out whether the sponsoring organization allows for the transfer of a donor advised fund. Again, the donor has yielded legal control of the donated assets, but if the relationship with the sponsoring organization sours, it may be possible to transfer the donated assets to a different sponsoring organization.
Rebecca Gardner is an experienced attorney who can help you navigate these issues. Call the HMS Law Group today for a consultation at (916) 252-0200.