Supporting philanthropic causes through charitable giving may be a priority for you. Setting up a donor advised fund is an effective (and increasingly popular) strategy for donating to charities while receiving a tax break for your contributions. According to the National Philanthropic Trust’s 2015 Donor-Advised Fund Report, contributions to donor-advised funds accounts reached an all-time high of $19.66 billion in 2014.
What is a Donor-Advised Fund?
A donor-advised fund, or “DAF” for short, works like a charitable savings account. With a donor-advised fund, you make irrevocable contributions of personal assets into the fund. The contribution grows tax free for future distribution to qualified charities through grants. You can typically recommend which charities you wish to receive the donations, although the sponsoring organization has the final say in the money’s disbursement. Recipients of any grants from the DAF must be public charities in good standing with the IRS.
Donor-advised funds are notable in that they can facilitate anonymous charitable gifts because they are not required to disclose any details regarding the source of the grant. Grants from a donor-advised fund ultimately come from the sponsoring charitable organization rather than an individual. However, donors may request the grants from the DAF be made acknowledging the source of the donor-advised fund.
How to Start a Donor-Advised Fund
There are several donor-advised fund sponsors ranging from large, national providers to local community foundations. While the overall approach to donor-advised funds is relatively standardized, the requirements may vary. Details such as the minimum starting account, size of any subsequent donations and administrative fees may be different across providers.
You can typically contribute cash, securities, and, sometimes, real property to a donor-advised fund. Check with the sponsoring organization on the types of assets accepted and any minimum contribution requirements for initial and subsequent contributions or grant amounts. In general, large, national DAF providers can handle more “complex” assets such as real estate and shares in a small business. So, if you are looking to contribute “non-traditional” or non-cash assets, national DAF providers may be a better choice than a small, locally based provider. Also ask about any grant restrictions or services offered by the organization.
Donor-Advised Funds vs. Foundations
The popularity of donor-advised funds continues to grow in large part due to tax benefits and ease of operation, especially compared to establishing a private foundation. One of the biggest differences between donor-advised funds and private foundations is the cost to maintain and run them. Private foundations generally have higher administrative costs and can take weeks or months to start. Another key difference is the valuation of non-cash charitable gifts. Foundations value contributions other than publicly-traded stock (which is valued using fair market value) at cost basis (the original purchased value). Contributions made to a DAF use fair market value for charitable donations. Tax deduction limits are also substantially different between donor-advised funds and foundations. The tax deduction limit for cash contributions is 50% of adjusted gross income for a donor-advised fund, while only 30% for private foundations. Tax deductions for non-cash gifts, such as stock or property, are 30% of adjusted gross income for a DAF, while a private foundation is limited to a 20% deduction. Private foundations offer more complete control on the administration of gifts, however. Donor-advised funds allow for the recommendation of where to distribute grants, but private foundations let you manage assets and specify the charities to receive the funds from the foundation.
Tax Perks of Donor-Advised Funds
You will generally be able to claim an income-tax deduction in the year you set up the fund, even though the money would not be distributed until later. With non-cash contributions, the tax deduction received by the donor is the fair market value of the asset. Donating appreciated securities will help you avoid capital gains taxes. Wealthy donors will see the value of their estates reduced by their contributions, potentially saving future estate taxes.
If you anticipate an increase in taxable income, you may be able to reap additional tax benefits from your charitable gift. Timing your contribution to a donor-advised fund to coincide with a conversion from a traditional individual retirement account (IRA) to a Roth IRA can help offset the additional taxable income from the conversion.
To learn more about donor-advised funds and how they can fit into your estate plan, contact a Fifth Third financial advisor and wealth planning specialist.
Fifth Third Bank does not provide tax or legal advice. Please consult your tax adviser or attorney before making any decisions or taking any action based on this information. This information is provided for educational purposes only and does not constitute the rendering of tax or legal advice.
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