Individuals who wish to make a commitment to philanthropy often consider establishing a private foundation. But Donor-Advised Funds offer significant advantages with no start-up costs, higher tax deduction limits, and less paperwork and expense. These funds are charitable organizations set up to receive your donations and administer your gifting plan. They have a structure that makes them efficient and inexpensive.
What are the advantages to you?
_ An immediate charitable donation –
With proper tax planning you will receive
an immediate tax deduction for the total value
of your gift.
_ Spread donations out over several years –
You are able to make a large gift in one year,
but determine the charities you wish to
benefit over time.
_ Avoid capital gains taxes –
When you gift appreciated assets (rather than sell them
outright), you avoid paying capital gains tax.
Examples of this kind of gift might include
highly appreciated stock, mutual funds, and real estate.
_ Reduce estate taxes –
Your charitable donation reduces the value
of your estate and lowers any potential estate tax consequences.
Who might use them?
We’ve identified some people who would benefit by making a gift to a Donor-Advised Fund. Do you see yourself in this group?
_ Planning a gift of $10,000 or more –
Most Donor-Advised
Funds have minimums of at least $10,000. Obviously they will
accept more, but you should be careful to contribute amounts
that work with your income tax situation.
_ Expect to receive a large spike in income in one year –
It makes very good sense to make a large donation in a highincome
year. The donation will reduce your tax bill at your
highest tax rate.
_ Want a structured approach to charitable giving –
These
funds create structure to your charitable giving. They remind
you when it is time to recommend a charity and they handle
the administrative details.
_ Direct your investment –
You may want to retain, or assign to
your investment advisor, control of the way in which your gift
is invested over time.
What are the Disadvantages? The disadvantages of making a gift to a Donor-Advised Fund are:
_ You cannot control the decision about the
charity –
The tax code requires that you give
control of the gift to the Donor-Advised Fund,
which retains the right to make the final
decision about your designated charity.
Normally, they follow your wishes, so this
should not be a problem.
_ Limited investment options –
In some cases,
the Donor-Advised Fund may offer limited
investment choices or retain full control of
the investment. Careful selection of the Donor-
Advised Fund can prevent this problem and
allow you to direct the investment management
choices. BWFA can help you select the fund
which best suits your needs.
_ Less flexibility than a private foundation –
Donor-Advised Funds do not allow the donor
to use the gift for personal benefit. For those
individuals gifting larger amounts of $1,000,000
or more, a private foundation will offer more
flexibility, including the opportunity to put family
members on the foundation’s payroll.
A Donor-Advised Fund allows you to build a legacy of philanthropy. Planning for and recommending grants can be an activity you share with your family and pass on to your heirs.
If you would like more information about this topic, please feel free to contact us.
