A donor-advised fund offers an easy way for a donor to make significant charitable gifts over a long period of time. A donor-advised fund is 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.
Contributions may be tax deductible in the year they are paid to the fund, subject to the usual limitations, if they are structured so they aren’t considered earmarked for a particular grantee. 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. The fund owns the contributions and has ultimate control over grants.
The community foundation was the first type of host organization to offer donor-advised funds but, today, many financial institutions offer them, and many public charities have funds or will create a fund upon request. Such as the Oshkosh Area Community Foundation Donor-advised Funds and the Raymond James Donor-advised Funds.
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How does a donor-advised fund work?
It’s easy to set up a fund 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 less than those required by private foundations.
During life, the donor (or the donor’s designee) can make ongoing, non-binding recommendations to the fund as to how much, when, and to which charities grants from the fund should be made. Additionally, the donor can offer advice to the fund regarding how contributions should be invested. The donor may suggest that, upon death, grants be made to charities named in his or her will or other legal instrument such as a revocable living trust. Or, the donor may designate a surviving family member(s) to recommend grants. However, the fund is not obligated to follow any of the donor’s suggestions—hence the name “donor-advised fund.” As a practical matter, though, the fund will generally follow a donor’s wishes. Distributions to grantees are typically identified as being made from a specific donor’s account, but they can be made anonymously at the donor’s request.
Advantages
- Lower contribution minimums (e.g., $10,000), easier and less costly to set up and maintain than private foundations or supporting organizations
- Some involvement in grantmaking
- Donors can obtain expert advice on grantmaking
- Donors may receive immediate income tax deductions
- Can reduce or eliminate capital gains, gift, and estate taxes
- No excise tax or payout requirements
- Accounts can be personalized or donors can give anonymously
- Accounts may be transferable to the next generation
Disadvantages
- Contributions are irrevocable
- Lack of control over investments and grants; investment options may be limited
- Grants may be limited geographically to a particular state or community, or by the fund’s charitable mission
- Assets that pass to charity do not pass to heirs
- Duration of donor’s philanthropy may be limited
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