Definitions

advised

Donor advised fund

A donor-advised fund is a charitable giving vehicle administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A donor-advised fund offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation. Donors enjoy administrative convenience, cost savings and tax advantages by conducting their grantmaking through the fund.

Community foundations pioneered the development of donor-advised funds, and a number of commercial sponsors, educational institutions, and independent charities now offer this service. Donor-advised funds are the fastest growing charitable giving vehicle in the United States of America, with more than 100,000 donor-advised accounts established, holding over $17.5 billion in assets.

Because the fund is housed in a public charity, donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Further, donors do not incur the cost of establishing and administering a private foundation, including staffing and legal fees. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over the contribution, granting the donor advisory status. As such, they are not legally bound to the donor, but make grants to other public charities upon the donor's recommendation. Most foundations that offer donor advised funds will only make grants from these funds to other public charities, and will usually perform due diligence to verify the grantee's tax-exempt status.

Regulation

Current U.S. tax law allows the donor of appreciated securities or other assets to get a tax deduction for the market value of the donation and avoid capital gains taxes. This double tax advantage can make donating appreciated assets to a charitable organization more attractive than selling the assets and donating cash. By donating appreciated assets to a donor advised fund and then advising the fund to make donations to several charities, one can reap these tax advantages without the hassle and paperwork of transferring non-cash assets to several organizations. This combination of convenience and full tax advantage is one reason that donor advised funds are used

While private foundations in the United States are heavily regulated by the Internal Revenue Service, including rules on oversight and minimum annual payouts, donor advised funds housed in public charities are not subject to the same tax restrictions. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (H.R. 4) into law, which includes a number of changes to the regulatory framework for donor-advised funds, and follows both House and Senate passage of H.R. 4. The sections dealing with donor-advised funds include:

  • Legal definition of a donor-advised fund.
  • A list of prohibited payments to donors and advisers to donor-advised fund.
  • New rules about what grants can be made from donor-advised funds.
  • The documentation required for all contributions to donor-advised funds.

Tax Efficiency Example

The following example is taken from Vanguard’s marketing material for their plan:

Suppose you have 1,000 shares of stock that you purchased 15 years ago (thus, you’re in long term capital gains territory). Assume that you purchased the stock for $10 per share and it is now worth $100 per share. Now, let’s compare the cost to the donor of making a contribution of $100,000 to a charity of your choice. We assume a 35% income tax rate and 15% long term capital gains tax rate.

Option 1: Contribute cash from sale of securities

  • Immediate cost of donation: $100,000
  • Capital gains tax incurred: $13,500 (15% times ($100k minus $10k))
  • Income tax saved: ($35,000) (35% times $100k)

Net cost to donor: $78,500

Option 2: Contribute appreciated securities to donor advised fund

  • Immediate cost of donation: $100,000
  • Capital gains tax incurred: NA (15% times $100k minus $10k)
  • Income tax saved: ($35,000) (35% times $100k)

Net cost to donor: $65,000

Thus, you can effectively contribute $100,000 to the public charity of your choice for $13,500 less in actual donor cost by using the donor advised fund.

List of largest commercial brokerage-run donor advised funds

List of Donor Advised Giving Programs

See also

Further reading

References

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