Donor Advised Funds: More effective & involved philanthropy

Donor Advised FundsBy guest author: Al Zimmerman, Executive Director-Northwest Christian Community Foundation

In times past, generous families used to just simply write checks and send gifts to the charities traditionally supported by their family. Today’s donors, more than ever before, are concerned about how their funds are invested, want to know how their gifts are going to be used, and want a report on what actually happened with their contributions to support an organization’s project. Donors want to be involved – to volunteer, to contribute to those organizations that have touched their lives, and to see results.

One of the most effective tools for effective philanthropy is a donor advised fund (DAF). A DAF is a an account that allows the donor to make a contribution and then later advise the sponsoring organization on an ongoing basis about grants from the fund to other charities and how the monies in the fund are to be invested. The donor advised fund is a simple investment that gives the donor the express right to participate in the decisions on the use of his or her contribution. DAFs are irrevocable gifts to a public charity – such as a community foundation, commercial gift fund, or a major university – that then provide an opportunity for the donor to recommend grants to other charities from the fund each year. Many large investment firms have also established separate charitable entities that offer DAFs.

The donor to a donor advised fund receives at least three tax benefits for contributing to a DAF:

  1. An immediate income tax deduction. Since the contribution is a gift to a public charity, the donor is able make use of the maximum allowable tax benefits associated with a charitable gift.
  2. Avoidance of capital gain taxes if the gift involves appreciated property.
  3. A reduction of the donor’s gross estate by the amount of the gift.The sponsoring organization (community foundation or university) does all the legal, fiduciary, and accounting work associated with maintaining the fund. The donor is able to focus his or her energy on grant-making functions, even though this activity can be delegated if the donor desires.

Donor advised funds have a number of advantages over other giving vehicles:

  • Convenience – simple, flexible, and efficient are words that describe the role of DAFs. The charity does all the work, so the donor can concentrate on the joyous role of being a philanthropist.
  • Tax benefits – Gifts of cash to advised funds are tax-deductible up to 50% of Adjusted Gross Income, compared with up to 30% of AGI for gifts of cash to private foundations.
  • Privacy – Families concerned with privacy may prefer to use a donor advised fund. Grants from donor advised funds can be made anonymously by the host charity. Donors who don’t want to be bombarded by grant requests, can use a DAF to make their gift to campaign projects or controversial charities.
  • Family involvement – The values and priorities of the parents can be transferred to the children as the next generation helps make grant decisions. The family can meet together and discuss how fund distributions should be used to support the causes that are especially meaningful to them.
  • Generational philanthropy – The philanthropic family can see their charitable support continue as a legacy for the future. Most foundations will allow a DAF to continue for at least two generations.
  • Private foundation alternative – A DAF is an excellent alternative to the use of a private family foundation. There are numerous administrative costs with a private foundation that do not exist with a DAF. In addition to its operating costs, a private foundation pays an excise tax on its investment income. It also has restrictions on the available tax deduction for gifts, restrictions on excess business holdings, and restrictions on business dealings between the donor and the private foundation.

DAFs offered through the Northwest Christian Community Foundation offer some additional advantages:

  • Rather than holding the original gift amount and only allowing the fund’s earnings to be distributed, most NCCF advised funds allow both the principal and income to be distributed.
  • Depending on the size of the fund, the donor’s preferred investment manager may be involved in the management of the DAF’s assets.
  • NCCF is prepared to deal with complex assets, i.e. business interests, real estate, tangible property, etc. in the establishment of a donor advised fund.

There are times when something other than a simple contribution is appropriate. A DAF may provide the flexibility and involvement that can make your gifts even more significant in your life and community. The simplicity, low-cost, and tax advantages offered by DAF could be an attractive vehicle for you.

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