August 2, 2019
by Mark J. Palmer, Esq., The Joseph Group Capital Management
A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations the donor cares about.
Pursuant to Section 501(c) (3) of the Internal Revenue Code, irrevocable contributions of cash, securities or other assets to a donor-advised fund at a public charity (ex. The Columbus Foundation, The Catholic Foundation, The Jewish Foundation) generally gives the donor an immediate tax deduction. The funds can be invested for tax-free growth and the donor then recommends when and to what IRS qualified charities grants are made from the fund.
Appreciated assets (shares of stock, real estate, etc.) are typically the most favorable, as they allow the donor to avoid capital gains taxes on those assets, while receiving the tax deduction on the gross (pre-tax) value of the donated assets.
Typically, the donated assets are sold within the donor-advised fund account and the proceeds invested in readily liquid assets (ex. publicly held stocks or bonds) until the donor suggests that funds be granted to the donor’s charity of choice. A best practice is for a donor to collaborate with their own financial professional team, as well as the appropriate persons with the public charity holding title to the donor-advised fund account.
Donor-advised funds allow for anonymity in that grants can be made without identifying the underlying donors. They cannot be used to fulfill pledges made in the donor’s individual name. This is one of the most commonly unknown or forgotten features by donor advised fund owners.
Donors can benefit by using on-line services, including an organized system to recommend grants and review transaction history. This can be especially helpful when a donor needs to know how much was granted to a specific charity in any given year.
Donor-advised funds, when used as part of an overall giving strategy, and executed properly, are a highly optimal vehicle for the tax benefits, ease of administration, flexibility, low costs and benefits to charities.