Donor-Advised Funds and Foundations

Donor Advised funds represent almost 10% of all individual giving in the United States and has doubled over recent years. How does the donor advised fund work and what are its benefits? Here’s how they work. Donor Advised funds are organizations that are eligible to receive tax deductible donations. Note that for tax purposes, you make a deductible donation when you donate or put money into the donor advised fund. That donation allows you to recommend distributions from the fund to charitable organizations. Sometimes these distributions are called grants. Once again, your deductible donation occurs when you donate to the donor advised fund, not when the fund makes distributions to the organization’s the amount you can recommend for distribution is usually the amount you’ve donated to the fund unless any previous distribution recommendations you’ve made. Here’s an example. Let’s say I donate $10,000 to a donor advised fund. I’m eligible to deduct that on my tax return. Assuming I don’t take the standard deduction in the year I make the donation to the fund. I can now recommend $10,000 of distributions to charitable organizations from the fund. Let’s say I choose to recommend that charity ABC receives $2,000. The fund sends that money to ABC and the letter may reference my name and address as the one who recommended the distribution. The next year I donate another $10,000 to the fund, I can now recommend distributions totaling $18,000, which is the $20,000 total that I’ve donated less than $2,000 that was distributed in the prior year. I can choose to recommend distributions at any time in the future until my balance reaches zero. Donor Advised funds provide many benefits and options, income tax deductions, you receive an income tax deduction in the year you contribute to your fund. This means you can make a large donation in one year that you distribute over many years. In the next section of the course. I’ll explain how that can decrease your taxes over giving a small amount every year. Another benefit of making infrequent large gifts is that you have to keep track of fewer receipts then making small donations directly to multiple organizations. This makes gathering receipts to prepare your taxes much easier. You can also set automatic distributions so that distributions are automatically processed every month, quarter or year. I remember writing checks every quarter to organizations I supported. Now I just get an email from the donor advised fund saying they automatically processed the distribution recommendations I set up years ago, ease of donating stocks, bonds and other investments. In an earlier lecture I showed the significant tax benefits of giving stocks, bonds and other investments that have gone up in value since you purchased them. Many organizations have a hard time accepting and processing these donations, but Donor Advised funds are well versed in handling these In fact, some of the larger Donor Advised funds are run by investment brokerage companies. Avoid capital gains taxes. This relates to the previous benefit, since it’s easy to donate investments for which you would incur a capital gain if you sold them. Donor Advised funds are an easy way to donate the investment to avoid the capital gains tax. Your Account Balance grows tax free. Many Donor Advised funds allow you to pick how your donation is invested. Once it’s in the donor advised Fund, the investment performance increases or decreases your account balance. For example, let’s say you donated $1,000 to the fund and one it invested in a choice that earns 3%. One year later, your account balance which is the amount you can recommend for distribution has grown to $1,030 your $1,000 donation and $30 or 3% earnings on that donation amount. Anonymous giving are custom named account. The deductible donation occurs when you give to the donor advised fund. They will send you a receipt for that donation. You can then instruct them to make distributions from your account with no mention of your name to the organization’s You can also name your account with your family name like the Stevens family fund. You have more flexibility in how you’re recognized by organizations. There. some downsides to Donor Advised funds, they often charge a small fee for their service. This fee may be far less than the increased giving you can do because of tax savings from the fund. Funds also have minimum initial donation requirements and minimum distribution amounts. For example, one popular fund has a $5,000 minimum initial donation and $50 minimum distribution. Using a fund is slightly more complicated than giving directly to organizations. But this small complexity is usually offset by easier tracking of receipts as mentioned earlier. An alternative to a donor advised fund is a private foundation. private foundations are more expensive to set up and maintain than a donor advised fund. They also have some tax disadvantages compared to Donor Advised funds. However, they give the donor much more control over granting decisions have more investment options and can donate to a wider variety of organizations and individuals. If you donate significant amounts of money, talking with your tax advisor about Donor Advised funds or private foundations might say do lots of taxes which you can use to increase your giving.