Give Creatively with Donor-Advised Funds


By Colleen Hasey Schuhmann, CRPC Special to The Pineapple Americans are generous and contribute billions of dollars to charity each year, using a variety of methods. One creative way of gifting is through a donor- advised fund, a separately identified fund or account that is maintained and operated by a section 501(c)(3) charitable organization. Donor-advised funds, which offer immediate tax benefits, are becoming increasingly attractive option for individuals, families and organizations looking for alternatives to direct giving or private foundations. With more than $25.2 billion in assets and over 152,000 account holders in 2009, according to the National Philanthropic Trust, donor-advised funds are the fastest growing charitable giving vehicle in the U.S. Donor-advised funds are usually offered by foundations, mutual fund groups, other financial firms and universities, who often partner with a charity on the offering. By working through the public charity administrating the donor-advised fund, donors make irrevocable contributions to the fund, which then invests the money in an account the donor creates from a list of different mutual funds. Individuals can contribute to the account cash or appreciated assets, such as securities, cash or real estate. Next, the donors make a recommendation, if they choose, on the grants the fund will issue to charity. The donor can also specify that the income and/or principal from the fund be available for distribution to charity. While donors can recommend which charities should receive contributions, the fund makes the actual grants. This provision is often included in the gifting agreement and offers protection from gifts being allocated to inappropriate charities at the behest of the donor. The benefits of donor-advised funds The benefits donors receive from using donor-advised funds include the ability to donate a wide variety of assets, an immediate tax deduction, flexible grantmaking and the opportunity to create a legacy. The charitable assets can also be passed on to future generations to oversee and/or can be given directly to charitable organizations. Another advantage of donor-advised funds is that the donor does not incur the cost of establishing and administering a private foundation, making donor-advised funds appealing for people giving less than $1 million. Many donor-advised funds require a minimum contribution of $5,000 or $10,000, and some funds may require a larger upfront contribution, whereas a private foundation can cost $500,000 or more to establish. Since the contributions are being made to a public charity, the donor receives an immediate tax deduction, including a deduction for a cash donation of up to 50% of the donor’s adjusted gross income (AGI), or a deduction for securities and other appreciated assets of up to 30% of their AGI. Moreover, donors can avoid capital gains taxes on gifts of appreciated property and estate taxes, helping the investment in the fund grow tax-free. When contributing assets to donor-advised funds, a donor can potentially give more to charity and pay less in taxes. The following example demonstrates the tax and giving advantages of contributing appreciated assets to a donor-advised fund. In this example, $100,000 in long-term appreciated securities is being donated with a cost basis, or original purchase price of $30,000. If the donor sells the securities and donates the cash proceeds to charity, he or she will be subject to a capital gains tax of 15% of $70,000, or $10,500. That leaves the charity with $89,500 of the securities’ value. But if the donor contributes the $100,000 of securities directly to a donor-advised fund, the charity receives the full amount of the donation. To receive the tax deduction, the donor must issue the gift by year end. Possible drawbacks of donor-advised funds Donor-advised funds do come with some limitations, such as the loss of complete control over the workings of the fund. And while the donor may provide suggestions about the distributions the institution makes from the fund, the recommendations are only advisory. However, most suggestions are followed by the administrating charity, but they are not obligated to do so. In contrast, donors in private foundations can create their own board, pick investments from across the financial industry and give equally to foreign and domestic charities. Other potential limitations of donor- advised funds include the management fees and the minimum investment requirements associated with the contribution. While the fees are low, (management fees are typically less than 1% plus other expenses associated with the investments), they are still something to consider for potential donors. For more information, please contact Colleen Hasey Schuhmann, Vice President – Wealth Management at UBS Financial Services in Boca Raton. She can be reached at 561-367-1817.