Getting Charitable: The Basics of Donor Advised Funds

charitablecontributions2Key Takeaways

  • Donor-advised funds have similar advantages to private foundations but require less time, money, legal assistance, and administration to establish and maintain.
  • A donor can generally take an immediate income tax deduction for contributions, but may spread gifts out over months or several years.
  • Many institutions provide these charitable vehicles.

It’s that time of the year again.  As year-end approaches, we get many calls and questions about giving to charity.  A donor-advised fund offers an easy way for a donor to make significant charitable gifts over a long period of time. It’s similar to a private foundation but requires less money, time, legal assistance, and administration to establish and maintain. A donor-advised fund also enjoys greater tax advantages than a private foundation.

What is a donor-advised fund?

Technically, a donor-advised fund is an agreement between a donor and a host organization (the fund) that gives the donor the right to advise the fund on how the donor’s contributions will be invested and how grants to charities (grantees) will be made. Though they can bear the donor’s name, donor-advised funds are not operated as separate entities like private foundations are, but are merely accounts held by the fund.

How does a donor-advised fund work?

It’s easy to set up an account. The donor first signs a letter of understanding with the fund, establishes an account, names the account, and recommends an investment strategy. Then, the donor makes required minimum contributions of assets, which may include cash, marketable securities, and other types of assets, depending on the fund. The required minimum contributions vary from fund to fund, but are usually $5,000 or more.

Income taxes

A donor can generally take an immediate income tax deduction on his or her federal income tax return for contributions of money or property. The amount of the deduction depends on several factors, including the amount of the contribution, the type of property donated, and the donor’s adjusted gross income (AGI). Generally, deductions are limited to 50 percent of the donor’s AGI. If the donor makes a gift of long-term capital gain property, the deduction is limited to 30 percent of the donor’s AGI. The fair market value of the property on the date of the donation is used to determine the amount of the charitable deduction. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.

These funds are very easy to establish, but you don’t want to wait until year-end.  Institutions get flooded with account requests and gifting towards year-end which slows account setup.  Contact me for more information if you are interested in learning more about donor-advised funds.

About Mark Rioboli

Mark A. Rioboli, CFP®, CFS is Director of Wealth Management for Independence Advisors, bringing over 25 years of experience in the wealth management industry. Have a question for Mark? CLICK HERE TO ASK MARK

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