Donor-advised funds are great tax planning vehicles, especially when you want to make a large tax-deductible contribution but have not identified specific charities to support. Though many donor-advised funds administrators are available, the one you choose should be driven by your philanthropic goals. Today’s blog covers a few things to consider when making your decision.
What is a Donor-Advised Fund?
Donor-Advised Funds gained popularity in the 1990s although they’ve been around since the 1930s. A donor-advised fund is a fund that is established as a public charity. They allow donors to contribute and receive a current year tax deduction while providing grants to charities from the fund over time.
What are you contributing?
While some funds have minimum contribution amounts, many also have limitations on the types of assets you can contribute. If you want to donate complex assets such as real estate, privately held stock, private equity funds, restricted stock, and partnership interests, you will need a fund that accepts these assets. All funds do not accept complex assets. Additionally, many funds reserve the right to reject assets if they are too difficult to process or cause excessive unreimbursed expenses. They all have a list of eligible assets, so be sure to check before selecting a fund.
Charities you plan to support
As a donor to a donor-advised fund, you can recommend grants. However, grants can only be made to qualified U.S. tax exempt organizations. A qualified charity is one that qualifies as tax exempt under IRC section 501(c)(3). Grants cannot be made to foreign charities. If you want to support a foreign charity you can either make a grant to a U.S. charity doing international work or grant to a U.S. intermediary that can direct funds internationally. If you want to support a foreign charity directly this cannot be done through a donor-advised fund.
Donor-advised funds allow donors to name successors. Successors can continue to recommend grants after the initial donor’s death. Donors can also name charities to receive the balance of the account after their death. It’s important for donors to make decisions about their wishes for their accounts especially if they want to name a successor. This is also an opportunity for charities to request to be named as beneficiaries. Many donors are using donor-advised funds as the vehicle for their charitable giving. As a result, charities are missing a huge opportunity if they’re not reaching out to their top donors requesting to be named as a beneficiary.
Confused? Don’t be. Call on The Tax Warriors ® at Drucker & Scaccetti with your questions about donor-advised funds. Planned correctly, donor-advised funds could be the ideal way for you and your family to carry out your philanthropic goals.
As with any article that discusses tax treatment, the usual disclaimers apply: This is a generalized overview, does not represent advice, and may not apply to your situation. Do not use this article to make tax or investment decisions. Consult your tax expert or call us to be that expert.