Many people who support charities will limit their giving to writing a check (or perhaps these days using a great online giving portal like GiveMN.org). However, increasingly donors are taking advantage of the flexibility, tax savings, and long-term planning offered by planned giving. When a donor works with a planned giving professional, often in conjunction with their estate planning attorney, that team will work together to maximize a donor’s tax savings and charitable impact today and long into the future. Planned gifts include Charitable Trusts, Charitable Gift Annuities, gifts of Life Insurance, gifts of an IRA, gifts of land or a residence, and giving through a Donor Advised Fund, to name a few. Each of these methods is a tool that can help an individual make philanthropy part of his or her larger financial plans and estate plan. Donors may take advantage of a single planned giving vehicle, or may utilize many in a comprehensive charitable plan that takes them through a lifetime of giving to a chartable legacy left through an estate.
Today’s article will focus on Donor Advised Funds. A Donor Advised Fund can serve an individual during his or her lifetime with a number of great benefits. The Fund can also be a piece of an estate plan and serve as a repository for all of a client’s charitable assets.
THE DONOR ADVISED FUND
A Donor Advised Fund acts like a private family foundation, but with a lot less muss and fuss. A family can open a Donor Advised Fund with their local community foundation and through it, support any number of charities nation-wide. For a small fee—usually between one and two percent of the value of the fund with no out-of-pocket costs—a donor can have all the flexibility of a private family foundation with a fraction of the administrative hassles and cost. Additionally, gifts into a Donor Advised Fund receive more favorable tax treatment than gifts to a private foundation. In summary, a Donor Advised Fund can offer a donor flexibility and efficiency while setting up the foundation for a lifetime of philanthropy and a permanent charitable legacy.
How it Works
At the Catholic Community Foundation, a donor may open a Donor Advised Fund with an initial gift of $10,000 or more. The donor will receive a tax deduction at the time the gift is made. Then, the donor may recommend grants from the fund at any time and in any amount. A donor may also contribute additional gifts to the fund at any time and in any amount.
Donors may contribute any marketable asset to a Donor Advised Fund, including securities, mutual funds, land, annuity contracts, and even shares of a privately held business. In this way, assets that some smaller charities may not have the infrastructure to receive may still be used to support that charity via the Donor Advised Fund. Many donors use a Donor Advised Fund as an easy way to make donations using highly-appreciated non-cash assets.
Why would a Donor Advised Fund Help Me?
Ease and Efficiency
A Donor Advised Fund offers ease and efficiency to donors who support multiple charities annually. A donor receives a tax deduction at the time assets are contributed to the Donor Advised Fund. A grant leaving the Donor Advised Fund has no effect on the donor’s taxes. As a result, a donor need only keep copies of a gift receipt from each contribution to the Donor Advised Fund. The donor then avoids the hassle of collecting a tax receipt from each of the dozens of charities supported each year. Additionally, a donor should have online access to all information about their Donor Advised Fund, including balances, a list of all gifts made into the fund, and a list of all grants sent out from the fund. This can be an enormous help to donors as they work to organize and plan their charitable giving.
A Donor Advised Fund can also serve as a great resource to a donor who approaches the end of the taxable year and either receives an unexpected bonus or otherwise realizes that it would be to their tax advantage to make additional, and sometimes substantial, charitable contributions. By depositing these contributions into a Donor Advised Fund, the donor has the chance to take time and be thoughtful about how to distribute those assets to charities. The Donor may also choose to let the assets remain in the Donor Advised Fund for a period of years to grow tax-free. In this way, the original donation can provide even greater charitable impact with great tax savings.
Passing Philanthropic Values on to the Next Generation
As discussed in Maggie Green’s recent post, a Donor Advised Fund offers a unique opportunity for donors to pass philanthropic values on to the next generation. During the lifetime of the donor, the Donor Advised Fund offers a centralized way for parents to involve children in philanthropic decision making. It also can serve as a tool for parents to demonstrate the “hows,” “whens,” and “how much’s” of their annual charitable giving.
Many parents hope that their children will incorporate philanthropy into their own lives as a result of the example they set. A Donor Advised Fund offers a tangible tool for parents to show, in a centralized location, their history of charitable decision-making.
Then, many donors will name their children as “successor advisors” on their Donor Advised Fund. The successor advisor, when the time comes, may make grants from the Donor Advised Fund in the same way as the original advisors. Parents hope the children will use this “charitable inheritance” to support the charities they choose, and thereby become active in philanthropy. Additionally, the parents have left the children a recorded history of their values, as demonstrated by the charities they supported through the fund. Most donors will tell their children about their Donor Advised Fund and the children’s’ future role the operation of that fund. These conversations are unique opportunities for parents to talk openly with their children about why charitable giving is important to them. A gift planning professional or your estate planning attorney would be available to facilitate an inter-generational conversation about the Donor Advised Fund and the children’s’ role in the future of that fund.
Creating a Permanent Charitable Legacy
Finally, a Donor Advised Fund can be the first step toward planning a comprehensive charitable legacy that provides permanent support to those causes most meaningful to the donor. Many donors will actively use a Donor Advised Fund during their lifetime while still building resources in the Fund (which can grow tax-free) to create a permanent “legacy” endowment after they die, or after the term expires for the successor advisors. An endowment fund is a charitable fund that provides permanent support to selected charities or charitable causes. When an endowment fund begins, the principle of the fund is restricted in perpetuity—it may never be spent. Instead, the earnings on the fund provide a permanent annual income stream to support the ongoing needs of the donors’ charitable causes. Over time, a permanent endowment fund will distribute far more charitable support than was ever originally contributed to the fund. A Donor Advised Fund at a community foundation may convert, at a time specified by the donor, to a permanent endowment fund and provide an annual distribution of support to each of the charitable causes designated by the donor.
Donors who plan to establish a “legacy” fund may integrate this plan into their larger estate plan. The legacy fund will often become the repository for any estate assets earmarked as charitable assets. Planning for the conversion of a donor advised fund into a legacy fund can help focus and streamline a donor’s charitable estate planning. Working with an estate planning attorney, the donor may make plans to avoid estate taxes, and minimize tax losses on the estate by directing highly tax-burdened assets to the legacy fund, and leaving more desirable assets to their heirs.
Conclusion
A Donor Advised Fund is a useful and versatile planned giving tool for many donors. Talk with your estate planning attorney, your financial advisor, and/or a planned giving professional at your local community foundation to learn more about how a Donor Advised Fund can serve your philanthropy, both today and long into the future.
