Charitable donations can be powerful, not only for recipient charities, but also for those individuals who donate. A mechanism to assist donors in fulfilling their charitable desires, which continues to grow in popularity, is the use of donor-advised funds.
Donor-advised funds are accounts established with an intermediary agent called a sponsoring organization (a Section 501(c)(3) Organization), which allows donors to make irrevocable charitable contributions, receive immediate tax benefits, and then recommend outgoing donations to qualified charities or nonprofit organizations from the fund over a period of time.
Advantages to Donor-Advised Funds
- An account is set-up and separately identified by reference to contributions of a donor(s).
- There are no regulations about how quickly the money actually has to be distributed out of the fund to a charity or not-for-profit organization.
- The donor secures a tax deduction on the front-end for the amount contributed even if they have not chosen the intended recipient.
- The donor maintains advisory privileges concerning the distribution or investment of the funds held in the account.
- The donor can not only contribute cash and publicly traded stock, but the donor can donate assets such as collectibles or non-publicly traded stock. The fund will sell the asset and apply the proceeds to a donor-advised fund for use according to your wishes.
- Donations of appreciated stock can made without the consequences of incurring a taxable capital gain, since the donation is made at the fair market value of the stock, without regard to the original cost basis.
- The fund reduces the amount of paperwork and administrative hassles that would typically be required of donors, and provide the necessary documentation needed for a taxpayer's records.
- Similar to direct charitable donations, cash donations may be contributed up to 50% of donors' adjusted gross income (AGI) and up to 30% of the donors' AGI for non-cash contributions.
- Since a donor-advised fund minimizes the difficulty of turning non-cash assets into tax deductions, donors are encouraged to contribute more generously than they might otherwise contribute.
Disadvantages to Donor-Advised Funds
- Often there are minimum thresholds for contributions necessary to set up an account.
- Typically in practice donors' wishes are followed, however the fund manager does have the final discretion as to where your money will be donated.
- There are generally fees assessed to manage the fund, which ultimately reduce the amount remaining to distribute to charities or nonprofit organizations.
- Upon the receipt of the donation by the beneficiaries, often the beneficiaries will direct acknowledgement letters to donors, rather than the donor-advised fund. However, due to the immediate availability of the tax deduction to the donor at the time the contribution was made to the donor-advised fund, caution should be exercised to ensure that the tax deduction is not erroneously duplicated upon receipt of the acknowledgement letter.
- A negative aspect for the charities needing the funding is that donors are able to hold the assets in the fund without actually giving to a charity.
Donor-advisor funds are available at large institutional investment firms, but they can also be established through university and religious foundations.
Ultimately, you will need to determine your charitable objectives and carefully evaluate the pros and cons to any sponsoring organization’s donor-advised funds that you are considering. If you have questions about donor-advised funds, reach out to Schneider Downs and visit our SD Medallion webpage to learn about the specialized suite of wealth management services that Schneider Downs provides.