Is a Donor Advised Fund Right for Your Client?by
If your client is looking for advice on charitable planning, you may want to point them toward a donor advised fund. In this article, Bryce Sanders of Perceptive Business Solutions discusses the many advantages of a donor advised fund, from the tax breaks to the flexibility to choose when and how to donate.
The United States is often ranked as the most charitable country in the world. As an accounting professional, you’ve seen your clients make many charitable contributions, and you’ve probably made some contributions of your own. These types of gifts receive favorable tax treatment. Donor advised funds have become a convenient vehicle to support your client’s charitable intentions by giving them greater flexibility.
Typically, Americans make direct gifts to charity, generally of cash or appreciated securities, and the receiving institution, which has 501(c)(3) status with the IRS, sends a letter to the donor acknowledging the gift. Your client turns these letters over to you at tax time, and charitable contributions reduce your client’s taxable income. Everyone benefits.
Many of the country’s wealthiest families give to charity out of a feeling that with great wealth comes the responsibility to make the world a better place. The Ford Foundation, the Bill and Melinda Gates Foundation and the Walton Family Foundation are examples of charitable foundations established by these wealthy families. The advantage of a foundation is the ability to donate a large amount of money into it without needing to give it all away immediately, thereby extending the generosity through generations.
Why doesn’t everyone with money to give establish a private foundation? Because they are expensive to maintain and have considerable paperwork and reporting requirements. However, there is a charitable giving vehicle that is in between individual donations and private foundations that offers the advantages of the foundation structure.
Enter the donor advised fund, which can be set up with many major financial institutions. The division of the firm receiving these donations and maintaining the accounts has charitable status under the law. It’s like opening a brokerage account with recognized charitable organization status.
Here is what makes these accounts popular:
Gifts made to a donor advised fund are immediately tax deductible. As with a foundation, cash or securities transferred into a donor advised fund are treated for tax purposes as a gift made directly to a 501(c)(3) charity.
There are low minimums. Generally speaking, a large amount of money is not required to start a donor advised; one can be created with as little as $1,000.
Appreciated securities. It’s possible to donate stock with significant capital gains and get a tax deduction for the full amount. This is often how wealthy people make gifts directly to their favorite charities.
Gifts come from the fund. Your client might have charities they would like to support. With a donor advised fund, the designated gifts go directly to the charity.
Money in doesn’t equal money out. If your client donates $10,000 to their donor advised fund in 2021, they don’t need to disperse $10,000 in gifts during the same calendar year. The remainder can stay within the account to be given away later.
The monies can be invested and managed. Now the donor advised fund functions like a brokerage account. Your client can sell the appreciated securities they donated, buying other stocks instead.
Choose the name of the fund. In some cases, your client can give their donor advised fund a name, similar to the names given to foundations.
Choose the amount to donate. Let’s say your client had a good year and intends to give a lot to charity. If they haven’t found the ideal cause to support, they can donate the money to the donor advised fund, get the tax deduction and then give the money away later.
Remain anonymous. There are times your client may want to give anonymously for various reasons, such as to not get on the radar of other charities. Your client can use the fund to give anonymously.
Is it all good news? Generally, yes. It’s important to realize the reason your client is getting a tax deduction for a gift to charity is the nonrevocable nature of the gift. Your client can’t claim the money back later. Also, they cannot contribute to political causes because they aren’t 501(c)(3) organizations. There are certain limitations to fulfilling multiyear pledges, too. Since there’s an account structure, donor advised funds come with costs. There are other restrictions, so you’ll want to read up on the details.
A donor advised fund may be an excellent fit for your charitably minded client or for yourself.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.