As the year end approaches, many of us are thinking about the charitable contributions we may want to make to get additional tax deductions this year. We may be considering charitable contributions of appreciated assets, like stock. Often clients ask us if there is a way to accelerate charitable tax deductions by "parking" appreciated assets in a tax-exempt fund that can be used later to make charitable gifts.
One alternative, of course, is to create a private foundation. A gift to a private foundation will qualify for a charitable income tax deduction, but subject to certain limitations. For example, a gift of cash to a public charity is deductible up to 50% of your adjusted gross income for the year; a gift of cash to a private non-operating foundation is only deductible up to 30% of your adjusted gross income. A gift of appreciated property, other than a publicly-traded security, to a private non-operating foundation can only be deducted to the extent of your tax basis in that property; a gift of appreciated property to a public charity can be deducted based upon its fair market value. Private foundations must be carefully monitored by donors and their advisors in order to minimize their exposure to a number of potentially costly excise taxes. If you want to create a private foundation, you will need to form your own Nonprofit corporation or trust, and you will generally want to seek a ruling from the IRS to confirm the foundation's tax exempt status.
An easier alternative, and one that is often more favorable from a tax perspective, is to make a contribution to what's known as a "donor-advised" fund. These are funds operated by entities that are, themselves, recognized for tax purposes as public charities. Thus, a gift to a donor-advised fund is treated as a gift to a public charity. Many community foundations and charities, as well as charitable entities created by mutual fund companies and banks have created such funds. How do these funds work?
A separate account is created with the funds contributed by the donor -- typically named after the donor, i.e., "The John and Jane Smith Philanthropic Fund." The donor of the fund can periodically "recommend" how the fund and its earnings are distributed (among charities). "Co-recommenders" and "successor recommenders" can be designated. The donor may also be able to exercise some discretion as to how the fund is invested.
The organization administering the fund has ultimate control over the disposition of the fund, but the donor's recommendations will generally be followed unless they are inconsistent with the organization's tax-exempt status. In the case of funds created by operating charities (such as universities, religious charities, etc.), a certain portion of the fund earnings may have to be dedicated to the particular charity or in furtherance of its purposes. Before establishing your donor-advised fund, you should consult with the sponsoring organization so that you are aware of its requirements. For example, most funds have a minimum initial contribution (usually at least $2,000). Some also have a minimum applicable to any additional contributions. You should understand what fees will apply, including possible investment management fees and any fees charged for making distributions. Some funds require an annual minimum distribution (and may impose some restrictions on distributions above a certain amount). Others will limit the number of times you can request a distribution in a given year, or will have limits on the minimum amount that can be disbursed at one time. Donor-advised funds should not be used to satisfy your personal charitable pledge (or to fund your private foundation at a later date).
Our clients who have established donor-advised funds are generally quite pleased with them. They appreciate having the opportunity to take a current income tax deduction and decide, at a later date, how those contributed funds will be distributed to charity. They like the fact that they can direct the disposition of the fund in a manner similar to a private foundation, but without the cost or administrative aggravation that a private foundation can entail. We expect the number of available donor-advised funds to continue to expand, so that this type of charitable giving will be even more popular in the future.
Please contact us if you would like further information on charitable giving through a donor-advised fund (or a private foundation), or if you would like our assistance in evaluating your choice of possible donor-advised funds.
