The fastest growing vehicle for philanthropic giving just revved its engine and experienced one of its best years ever, according to the 2015 Donor Advised Fund Report, an annual study of how Americans use this unique giving tool. In 2014, a year when the U.S. economy as a whole grew by a modest 2.4 percent, the total assets in Donor Advised Funds increased by a staggering 24 percent to nearly $70 billion. Incredibly, last year about 1 out of every 12 dollars donated by an individual to charity went into a Donor Advised Fund.
Donor Advised Funds really took off as a tool for giving during the tech boom of the 1990s. A headline in the New York Times of nearly 20 years ago summed up the role of Donor Advised Funds quite succinctly with, “These Foundations Let Every Family Play Ford.” (Dec. 9, 1997).
Immediate Deduction, Deferred Distributions
You can establish a Donor Advised Fund in your name, your company’s name, or that of a loved one, such as the “John and Jane Smith Charitable Fund.” You then make a contribution into your newly created Fund and claim a tax deduction in the year your charitable gift was made. However, the distributions you make from your fund, commonly referred to as “grants,” can occur to virtually any charity you choose, anywhere in the country, on any timeline that works best for you. This makes a Donor Advised Fund an invaluable tax-planning tool.
For example, let’s say John and Jane’s business had an exceptionally profitable year. As a result, their accountant tells them that this would be a great year in which to make a significant charitable gift. Rather than giving it all away all at once to a single charity, John and Jane want spread their money around many organizations for many years to come. Hence, John and Jane donate $25,000 into their Donor Advised Fund. They can take a commensurate deduction on their 2015 taxes, but that $25,000 is available for John and Jane to make grants to the charities they love in future years. Even better, that $25,000 can be invested and will grow tax free, with all the earnings and appreciation available for any additional grants that John and Jane might choose to make.
Enormous Tax Benefits
Donor Advised Funds are similar to private foundations like the Ford Foundation or the Gates Foundation, but they offer several distinct advantages. You don’t need to have the billions of dollars of the Fords or the Gates to set up a Donor Advised Fund. While a private foundation typically takes millions of dollars of contributions before it is cost effective to operate, a Donor Advised Fund can be created at some organizations for as little as $1,000.
Donor Advised Funds operate under the corporate umbrella of a 501(c)(3) public charity, typically a regional community foundation (like our local Door County Community Foundation) or a national foundation affiliated with an investment company (such as Schwab). Whereas in a private foundation the accounting, administrative and investment costs are borne solely by a single donor, with Donor Advised Funds those expenses are spread out among hundreds if not thousands of funds. Hence, the cost of administering a Donor Advised Fund is typically a tiny fraction of the expense of operating a private foundation.
In addition, Donor Advised Funds are considered “public charities” by the IRS. As a result, donations to a Donor Advised Fund receive preferential tax treatment. For instance, cash contributions to private foundations are limited to 30 percent of your adjusted gross income as opposed to a more generous 50 percent limit for Donor Advised Funds.
The differences are even more pronounced when dealing with gifts of illiquid assets such as real estate. While you can generally claim a deduction of the fair market value of land you donate to your Donor Advised Fund, your deduction is limited to your cost basis – what you originally paid for the land – when you contribute it to a private foundation. The IRS also imposes excise taxes on private foundations and requires minimum distributions – rules which do not apply to Donor Advised Funds. That’s why Donor Advised Funds are known as the simplest, cheapest and most tax-efficient way for a donor to give back to the charities they love.
Making Giving Easy
Perhaps the greatest advantage of a Donor Advised Fund is how easy it makes your charitable giving. Rather than tracking dozens of contributions to different nonprofit organizations during the course of the year, you only need record the one gift you made into your Donor Advised Fund. You receive your deduction for your gift into your Donor Advised Fund, so the subsequent grants to charity you make from your fund have absolutely no impact on your taxes at all.
Donor Advised Funds also make it easier for you to donate appreciated assets. For instance, it is impractical to donate a single share of stock worth $100 to your church on Sunday. However, plenty of donors contribute a block of 100 shares of that same publicly traded stock into their Donor Advised Fund. The donor then generally avoids the capital gains tax, deducts the fair market value of their gift, and finally awards a grant of $100 in the form of a check from their Donor Advised Fund payable to their church on Sunday.
Finally, when you establish a Donor Advised Fund at your local community foundation, you have your own professional philanthropic staff. From the Silicon Valley Community Foundation with its $5 billion to the Door County Community Foundation and our $15 million in assets, each of the more than 750 community foundations across the country have a donor services team that serves as your philanthropic counsel. They are able to bring you ideas, quietly research charities on your behalf, and handle all the investment, accounting and administrative details so all you have to do is decide where you want your money to go.
Nearly $20 billion was donated into Donor Advised Funds last year. It’s the most convenient and flexible tool for giving available today. Visit your local community foundation to learn more, or visit the Door County Community Foundation online at GiveDoorCounty.org.
This column by Bret Bicoy originally appeared in the Peninsula Pulse on December 4, 2015.